-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PzfC6Uq8ZIi6Q7KW8DeVpyXJ8yBtLAyOdtl+qZIx8k4/PKtk0EIDjzNjye4GFM1D IN3iXK5z+E/rWlQmrpNBXA== 0000950172-02-001003.txt : 20020514 0000950172-02-001003.hdr.sgml : 20020514 ACCESSION NUMBER: 0000950172-02-001003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020514 FILED AS OF DATE: 20020514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OFFICIAL PAYMENTS CORP CENTRAL INDEX KEY: 0001094998 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 522190781 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28187 FILM NUMBER: 02647595 BUSINESS ADDRESS: STREET 1: THREE LANDMARK SQUARE CITY: STAMFORD STATE: CT ZIP: 06901-2501 BUSINESS PHONE: 2033564200 MAIL ADDRESS: STREET 1: 2333 SAN RAMON VALLEY BOULEVARD STREET 2: SUITE 450 CITY: SAN RAMON STATE: CA ZIP: 94583 FORMER COMPANY: FORMER CONFORMED NAME: US AUDIOTEX CORP DATE OF NAME CHANGE: 19990914 10-Q 1 opc10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number: 000-28187 OFFICIAL PAYMENTS CORPORATION - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 52-2190781 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Three Landmark Square Stamford, CT 06901-2501 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code (203) 356-4200 -------------- N/A ------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ As of May 10, 2002, 22,932,876 shares of the registrant's common stock were issued and outstanding. =============================================================================== OFFICIAL PAYMENTS CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002 TABLE OF CONTENTS ITEM PAGE NUMBER - ---------- ---------- PART I: FINANCIAL INFORMATION Item 1. Financial Statements............................................3 Condensed Balance Sheets as of March 31, 2002 and December 31, 2001...........................................3 Condensed Statements of Operations for the three months ended March 31, 2002 and 2001............................4 Condensed Statements of Cash Flows for the three months ended March 31, 2002 and 2001............................5 Notes to the Condensed Financial Statements.....................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................11 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................................18 PART II: OTHER INFORMATION Item 1. Legal Proceedings..............................................18 Item 2. Changes in Securities and Use of Proceeds......................18 Item 3. Defaults Upon Senior Securities................................19 Item 4. Submission of Matters to a Vote of Security Holders........................................................19 Item 5. Other Information..............................................19 Item 6. Exhibits and Reports on Form 8-K...............................19 Signatures...................................................................20 Index to Exhibits PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OFFICIAL PAYMENTS CORPORATION CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, December 31, 2002 2001 ------------- ------------ (Unaudited) ASSETS Current assets: Cash ............................................. $ 2,097 $ 3,569 Short-term investments............................ 43,214 45,561 Accounts receivable, net.......................... 6,545 3,666 Prepaid expenses and other current assets......... 115 105 -------- -------- Total current assets............................. 51,971 52,901 Property and equipment, net......................... 5,971 6,902 Other assets........................................ 44 44 -------- -------- Total assets.................................... $ 57,986 $ 59,847 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 4,947 $ 3,323 Accrued merchant discount fees.................... 1,473 1,775 Accrued payroll................................... 223 274 Accrued expenses.................................. 2,308 2,106 Restructuring obligations......................... 1,550 2,038 Current portion of capital lease obligations...... 532 543 -------- -------- Total current liabilities....................... 11,033 10,059 Long-term portion of capital lease obligations...... 52 165 Long-term restructuring obligations................. 1,945 2,029 -------- -------- Total liabilities............................... 13,030 12,253 -------- -------- Stockholders' equity: Common stock, $.01 par value; 150,000,000 shares authorized; 22,254,251 and 21,981,615 shares issued and outstanding as of March 31, 2002 and December 31, 2001, respectively............. 223 220 Additional paid-in capital........................ 130,487 130,127 Accumulated other comprehensive loss.............. (41) - Accumulated deficit............................... (85,713) (82,753) -------- -------- Total stockholders' equity...................... 44,956 47,594 -------- -------- Total liabilities and stockholders' equity...... $ 57,986 $ 59,847 ======== ======== See accompanying notes to unaudited condensed financial statements.
OFFICIAL PAYMENTS CORPORATION CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended March 31, ---------------------------- 2002 2001 -------- -------- Revenues............................................ $ 4,346 $ 3,502 Cost and expenses: Cost of revenues.................................. 3,128 2,805 Sales and marketing .............................. 1,039 2,380 Development costs................................. 876 1,039 General and administrative ....................... 1,557 2,105 Depreciation expense.............................. 927 454 Amortization of deferred stock-based compensation. - 19,803 -------- -------- Total operating expenses.......................... 7,527 28,586 -------- -------- Loss from operations................................ (3,181) (25,084) Other income, net................................... 221 949 -------- -------- Net loss............................................ $ (2,960) $(24,135) ======== ========= Basic and diluted net loss per share................ $ (0.13) $ (1.10) ======== ========= Weighted average shares used in computing basic and diluted net loss per share....................... 22,027 21,846 ======== ========= See accompanying notes to unaudited condensed financial statements.
OFFICIAL PAYMENTS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, ---------------------------- 2002 2001 -------- -------- Cash flows used in operating activities: Net loss............................................. $ (2,960) $ (24,135) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense............................ 927 454 Amortization of deferred stock-based compensation................................. - 19,803 Bad debt expense............................... 6 - Changes in operating assets and liabilities: Accounts receivable, net................... (2,885) 1,294 Prepaid expenses and other assets.......... (10) 166 Accounts payable and accrued merchant discount fees, payroll and expenses..... 1,473 4,188 Restructuring obligations.................. (572) - -------- -------- Net cash provided by (used in) operating activities.... (4,021) 1,770 -------- -------- Cash flows from investing activities: Proceeds from sale of short-term investments, net ... 2,306 4,115 Capital expenditures................................. 4 (1,270) -------- -------- Net cash provided by investing activities.............. 2,310 2,845 -------- -------- Cash flows from financing activities: Proceeds from exercise of stock options, net......... 363 643 Repayment of capital leases obligations.............. (124) (126) -------- -------- Net cash provided by financing activities..... 239 517 -------- -------- Net increase (decrease)in cash......................... (1,472) 5,132 Cash at the beginning of the period.................... 3,569 3,783 -------- -------- Cash at the end of the period.......................... $ 2,097 $ 8,915 ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest................................. $ 6 $ 32 ======== ======== See accompanying notes to unaudited condensed financial statements.
OFFICIAL PAYMENTS CORPORATION NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Official Payments Corporation (the "Company" or "Official Payments") is a leading provider of electronic payment options to government entities, enabling consumers to use their credit cards to pay, through the Internet or by telephone, federal and state income taxes, sales and use taxes, real estate and personal property taxes, tuition payments, utility payments, motor vehicle fees, fines for traffic violations and parking citations and other government-imposed taxes and fees. The Company commenced operations on June 26, 1996, initially offering its credit card payment services for the payment of fines for traffic violations, parking citations and real estate and personal property taxes. In 1998, the Company signed a credit card payment contract with the Internal Revenue Service ("IRS") to provide its services for the payment by telephone of personal federal "balance due" income tax in 1999. In 2000, the Company began processing estimated and extension tax payments, as well. In 2000, the Company entered into a contract with the IRS for an initial one-year term (2001), which the IRS subsequently renewed for an additional year (2002). That contract authorized the Company to collect credit card payments via its Internet platform, as well as by telephone. In August 2001, the Company announced that the IRS had further expanded the scope of its agreement with the Company to include two additional payment categories beginning in 2002: current-year delinquent tax payments and installment tax payments. In late April 2002, the IRS awarded the Company a new contract to continue providing its electronic credit card payment services for an initial one-year term, with the IRS having the option to renew this new contract for four additional one-year terms. As of March 31, 2002, the Company was processing, or had recently entered into agreements to process, payments for the District of Columbia, 21 state governments and over 1,200 counties and municipalities in all 50 states. The highest concentrations of local government entities serviced by the Company are in California, Michigan, Texas, Virginia and Washington. Comerica Incorporated, a financial holding company, is the record owner of approximately 52% of the outstanding common stock of the Company. BASIS OF PRESENTATION The accompanying condensed financial statements as of March 31, 2002 and the three months ended March 31, 2002 and 2001, are unaudited. The condensed balance sheet at December 31, 2001 has been derived from audited financial statements at that date. The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements, and in the opinion of management, reflect all adjustments necessary to present fairly the Company's financial position, results of operations and cash flows as of March 31, 2002 and for the three months ended March 31, 2002 and 2001. These adjustments are of a normal, recurring nature. These condensed financial statements and notes thereto are unaudited and should be read in conjunction with the Company's audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The results for the three months ended March 31, 2002 are not necessarily indicative of the expected results for the year ending December 31, 2002. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported results of operations during the reporting period. Some of the significant estimates embedded in the financial statements include the allowance for sales returns, doubtful accounts, and accruals for restructuring obligations and facility consolidations. With respect to estimating the allowance for doubtful accounts, management analyzes its historical reversals and chargebacks experience, the aging of accounts receivable, customer and product specific factors and client credit worthiness. In determining restructuring obligations, management considered the number of individuals affected by the action, the expected date of termination and the applicable severance amount. In addition, for lease termination obligations, management considered the actual or expected date of termination and did not consider any possible sublease income since the realization of sublease income is not probable and is not estimable. RECLASSIFICATION Certain amounts in financial statements for prior years have been reclassified to conform to the current year's presentation. CASH AND RESTRICTED CASH Cash consists of demand deposits and certificates of deposit with original maturities of three months or less. In December 1999, the Company entered into a letter of credit agreement to secure a facilities operating lease for the corporate headquarters located in Stamford, Connecticut. As part of this agreement, the Company is required to hold a three-month certificate of deposit as a form of security for the letter of credit. As of March 31, 2002, the three-month certificate of deposit amounted to approximately $151,000. SHORT-TERM INVESTMENTS As of March 31, 2002, the Company had short-term investments of $43.2 million. The Company classifies its short-term investments as "available-for-sale." Financial instruments classified as short-term investments include government securities and commercial paper (with a Standard and Poor's rating of A-1 or better), with maturity dates of generally less than twelve months. Such short-term investments are recorded at fair value, with unrealized holding losses reported as a separate component of stockholders' equity. As of March 31, 2002, the unrealized holding losses were approximately $41,000. There were no unrealized holding losses as of December 31, 2001. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. The Company performs ongoing credit evaluations of its clients and generally does not require collateral. Uncollectible accounts have been insignificant to date. Most of the Company's agreements with its clients (including the IRS) can be terminated by the respective client without cause on short notice, generally 30 to 90 days. In addition, a client may choose not to renew its contract with the Company or may not choose the Company's proposal in response to a Request for Proposals to perform additional service or the existing service in subsequent time periods. If one of the Company's larger existing government clients (such as the IRS) chooses to terminate its contract or memorandum of understanding with the Company, the business, operating results and financial condition of the Company could be materially and adversely affected. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets," the Company periodically evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of any asset to future net cash flows expected to be generated by the asset and the Company's terminal value. If any assets are considered to be impaired, the impairment to be recognized in the current period is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Since June 26, 1996 (inception) through March 31, 2002, no impairment losses have been identified. RESTRUCTURING CHARGE Restructuring activities are accounted for in accordance with the guidance provided by the Emerging Issue Task Force (EITF) in EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" and the Securities and Exchange Commission in SAB No. 100 "Restructuring and Impairment Charges." With respect to the recognition of restructuring expenses, these two pronouncements generally require management approval of the restructuring plan, the determination of the employees to be terminated and communication of the severance benefits arrangement to the employees. STOCK-BASED COMPENSATION The Company uses the intrinsic value method of accounting for all of its employee stock-based compensation plans. Expense associated with stock-based compensation is being amortized on a straight-line basis over the vesting period of the individual awards consistent with the method described in Accounting Principles Board (APB) Opinion No. 25. In the first quarter of 2001, the Company fully amortized the $19.8 million of deferred stock-based compensation for employee stock options and restricted shares of common stock that became fully vested, pursuant to the terms of the Company's stock incentive plans, as a result of Comerica Incorporated's acquisition of Imperial Bancorp (the parent of the Company's majority controlling stockholder), which constituted a change of control of the Company. COMPREHENSIVE LOSS Comprehensive loss is comprised of net loss and unrealized losses on available-for sale marketable securities. The Company's comprehensive loss is as follows (in thousands): THREE MONTHS ENDED MARCH 31, ---------------------------- 2002 2001 -------- -------- Net loss ....................................... $ (2,960) $(24,135) Change in unrealized loss on available-for-sale securities............... (41) - --------- ---------- $ (3,001) $(24,135) ========= ========== REVENUE RECOGNITION The Company's revenues are derived primarily from convenience fees paid by consumers for credit card payment services provided by the Company. Convenience fees are charged based on the amount of the payment processed and the type of obligation being paid. Revenues are recognized in the period in which the services are provided. The revenues are presented net of a provision for convenience fees when the collection of the amount due is not reasonably assured but is estimated and established in the period in which the services are provided. In the normal course of business and with respect to certain government clients, the Company collects tax payments in addition to the convenience fees, and then forwards the tax payments to the government entities. The Company's obligation with respect to the tax payments totaled approximately $0, and $678,000 at March 31, 2002 and December 31, 2001, respectively and is included in Accounts Payable on the accompanying balance sheet. ADVERTISING EXPENSE The cost of advertising is expensed as incurred. Such costs are included in sales and marketing expense on the condensed statement of operations and totaled approximately $220,000 and $1.4 million for the three months ended March 31, 2002 and 2001, respectively. In 2001 and the beginning of 2002, the Company entered into cooperative advertising arrangements with four of its credit card partners pursuant to which it will receive a total of $900,000 from the companies for use in the Company's 2002 April tax season advertising campaign. The Company considers these funds to be a reimbursement of costs incurred and nets the proceeds against advertising expenses as incurred. ACCOUNTING FOR INCOME TAXES Income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rate on deferred tax assets and liabilities is recognized in income in the period that includes the tax rate change enactment date. A valuation allowance is recorded to reduce deferred tax assets reported if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Note 2. NET LOSS PER SHARE Net loss per share is computed in accordance with SFAS No. 128, "Earnings per Share". Under the provisions of SFAS No. 128, basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of outstanding shares of common stock during the period. Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, potential common shares from options to purchase common stock using the treasury stock method. Net loss per share does not include the effect of 3,890,475 and 4,422,278 options to purchase common stock with a weighted average exercise price of $1.33 and $1.55 per share for the three months ended March 31, 2002 and 2001, respectively, because the effects are anti-dilutive. Note 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): March 31, December 31, 2002 2001 -------- ------------- Computer equipment.............................. $ 6,766 $ 6,771 Purchased software development cost............. 6,477 6,477 Furniture and fixtures.......................... 803 803 -------- -------- 14,046 14,051 Less: Accumulated depreciation.................. 8,075 7,149 -------- -------- $ 5,971 $ 6,902 ======== ======== The Company has adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires that certain costs for the development of internally used software be capitalized, including costs of coding, software configuration, upgrades and enhancements. Upon completion of the application and infrastructure development stage, the Company amortizes these costs on a straight-line basis over an estimated useful life of three years. As of March 31, 2002 and December 31, 2001, the Company capitalized approximately $6.5 million of its internally developed Web site. The net book values of these costs were approximately $4.3 million and $4.8 million as of March 31, 2002 and December 31, 2001, respectively. Certain computer equipment, software and office equipment are recorded under capital leases that aggregated $1.6 million as of March 31, 2002 and December 31, 2001. Accumulated depreciation on the assets recorded under capital leases aggregated $1.4 million and $1.3 million as of March 31, 2002 and December 31, 2001, respectively. Depreciation expense was $927,000 and $454,000 for the three months ended March 31, 2002 and 2001, respectively, which included depreciation expense for assets under capital leases of $63,000 and $125,000 for the three months ended March 31, 2002 and 2001, respectively. Note 4. AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION Deferred stock-based compensation are non-cash and have been presented as a separate component of operating expense in the Company's statement of operations. The following table shows the costs (in thousands) of such charges as allocated to sales and marketing, development costs and general and administrative expenses, which allocation is based on the functional responsibilities of the underlying employees: THREE MONTHS ENDED MARCH 31, ---------------------------- 2002 2001 -------- -------- Sales and marketing........................... $ - $ 1,872 Development costs............................. - 53 General and administrative.................... - 17,878 -------- -------- $ - $ 19,803 ======== ======== During the first quarter of 2001, the Company fully amortized the $19.8 million of deferred stock-based compensation for employee stock options and restricted shares of common stock that became fully vested, pursuant to the terms of the Company's stock incentive plans, as a result of Comerica Incorporated's acquisition of Imperial Bancorp (the parent of the Company's majority controlling stockholder), which constituted a change of control of the Company. Note 5. OTHER INCOME, NET Other income, net, consists of the following (in thousands): THREE MONTHS ENDED MARCH 31, ---------------------------- 2002 2001 -------- -------- Interest income.............................. $ 237 $ 1,006 Interest expense............................. (19) (32) Other income (expenses), net................. 3 (25) -------- -------- $ 221 $ 949 ======== ======== Note 6. CONCENTRATION OF REVENUES In the three months ended March 31, 2002 and 2001, transaction fees from IRS payments accounted for 36% and 47% of total revenues, respectively. The Company currently has agreements with the IRS which authorize the Company to collect credit card payments for balance due, estimated and extension taxes, current-year delinquent taxes and installment agreement tax payments. Note 7. SEGMENT INFORMATION The Company operates in a single operating segment. The Chief Executive Officer has been identified as the Chief Operating Decision Maker because he has final authority over resource allocation decisions and performance assessment. The Chief Executive Officer reviews revenues by product for purposes of making operating decisions and assessing financial performance. The financial information reviewed by the Chief Executive Officer is consistent with the information presented in the accompanying condensed statements of operations. THREE MONTHS ENDED MARCH 31, ---------------------------- 2002 2001 -------- -------- Revenues by product are: Transaction fees: Federal............................. $ 1,555 $ 1,641 State............................... 662 485 Local............................... 2,052 1,348 Other revenues........................ 77 28 -------- -------- Total revenues........................ $ 4,346 $ 3,502 ======== ======== Note 8. RESTRUCTURING AND ASSET ABANDONMENT The following table details the restructuring and asset abandonment activities during the three months ended March 31, 2002 (in thousands):
Facility Restructuring Employee Consolida Contract Restructuring Asset & Asset Separation -tions Settlements Total Abandonment Abandonment ----------- ----------- ----------- ------------- ----------- ------------- Balance at December 31, $ 2,358 $ 1,077 $ 632 $ 4,067 - $ 4,067 2001 Cash paid (360) (34) (178) (572) - (572) ----------- ----------- ----------- ------------- ----------- ------------- Balance at March 31, 2002 $ 1,998 $ 1,043 $ 454 $ 3,495 - $ 3,495 =========== =========== =========== ============= =========== =============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon the current economic environment and current expectations that involve risks and uncertainties, and you are cautioned that these statements are not guarantees of future performance. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as "may", "will", "should", "estimates", "predicts", "potential", "continue", "strategy", "believes", "anticipates", "plans", "expects", "intends", and similar expressions are intended to identify forward-looking statements. The Company's actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statement. A more complete description of these and other risks and uncertainties associated with the Company's business can be found in the Company's filings with the United States Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 Form 10-K"). The Company does not undertake any obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise. Overview Official Payments is a leading provider of electronic payment options to government entities enabling consumers to use their credit cards to pay, through the Internet or by telephone, federal and state income taxes, sales and use taxes, real estate and personal property taxes, tuition payments, utility payments, motor vehicles fees, fines for traffic violations and parking citations and other government-imposed taxes and fees. The Company commenced operations on June 26, 1996, initially offering its credit card payment services for the payment of fines for traffic violations, parking citations and real and personal property taxes. As of March 31, 2002, the Company offered 2,051 services to 1,202 government entities. In 1998, the Company signed a credit card payment contract with the Internal Revenue Service ("IRS") to provide its services for the payment by telephone of personal federal "balance due" income taxes in 1999. In 2000, the Company began processing estimated and extension tax payments, as well. In 2000, the Company entered into a contract with the IRS for an initial one-year term (2001), which the IRS subsequently renewed for an additional year (2002). That contract authorized the Company to collect credit card payments via its Internet platform, as well as by telephone. In August 2001, the Company announced that the IRS had further expanded the scope of its agreement with the Company to include two additional payment categories beginning in 2002: current-year delinquent tax payments and installment agreement tax payments. In late April 2002, the IRS awarded the Company a new contract to continue providing its electronic credit card payment services for an initial one-year term, with the IRS having the option to renew this new contract for four additional one-year terms. The Company began providing services for the payment of personal state income taxes in California in December 1998. As of March 31, 2002, the Company was providing, or had entered into contracts to provide (and was in the process of implementing), its payment services for the District of Columbia, as well as the states of Alabama, Arkansas, California, Connecticut, Illinois, Indiana, Iowa, Kansas, Maryland, Minnesota, Mississippi, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, Virginia, Washington, West Virginia and Wisconsin. For nearly all of these states, consumers can make payments to these states through both the Company's interactive voice response telephone ("IVR") system and Web site, except for Indiana and Washington where the Company is only authorized to offer its services through the IVR or Internet, respectively. In 2002, the Company begun offering its electronic payment services to non-governmental entities (e.g., non-government owned utilities, private universities, etc.) who may have a need for such services and wish to realize similar benefits as the Company's government clients. The Company's revenues consist primarily of convenience fees, which are transaction fees paid by consumers for using its credit card payment services. For processing many payments (including, personal federal and state income tax payments, sales and use tax payments and real and personal property tax payments), the amount of the convenience fee charged varies based on the specific amount of the underlying obligation. For processing other types of payments (including fines for traffic violations and parking citations), the amount of the convenience fee charged is fixed, regardless of the specific amount of the underlying obligation. Total revenues have increased significantly since the Company started providing services in January 1999 for personal federal income tax payments. The Company's primary cost of revenues is the merchant discount fees paid to its credit card processors, which is a function of the total amount paid by the consumer, the specific credit card used and the type of transaction. The Company also incurs variable telecommunications costs and IVR license royalty fees through its telephone conduit and third party technology license fees for payments completed via the Company's Internet conduit. Operating expenses include cost of revenues, sales and marketing expenses, development costs, general and administrative expenses, depreciation expenses and amortization of deferred stock-based compensation. In 2001, the largest component of these expenses was amortization of deferred stock-based compensation, which amounted to approximately $19.8 million for the three months ending March 31, 2001. In January 2001, the company completely amortized the deferred stock-based compensation for employee stock options that became fully vested as a result of Comerica Incorporated's acquisition of Imperial Bancorp, the parent of the Company's majority controlling stockholder, which constituted a change of control of the Company. Sales and marketing expenses consist primarily of advertising expenses and salaries and commissions for sales and marketing personnel. Development costs consist primarily of salaries for engineering personnel and consulting expenses relating to research and development activities. General and administrative expenses consist primarily of salaries and other compensation expenses for executive, customer service, finance and administrative personnel. The Company has incurred significant losses since inception and expects to continue to incur losses for the foreseeable future. The Company recognizes that further reductions in its operating losses are contingent upon its ability to increase consumer adoption rates of its services and to obtain lower merchant discount fees charged by the credit card companies. In addition, the Company is continuing to examine additional ways to improve the Company's internal operating efficiencies in order to reduce costs. As of March 31, 2002, the Company had an accumulated deficit of approximately $85.7 million. In November 2001, the Board of Directors approved and the Company initiated a restructuring plan to reduce certain of the Company's operating expenses. The restructuring plan includes a reduction in marketing, administrative and telephony costs, the involuntary termination of 44 employees, and the consolidation of certain facilities. Concurrently, the Company abandoned certain IVR equipment. During the quarter ended March 31, 2002, the Company paid approximately $572,000 of its restructuring obligations. There were no additional restructuring or asset abandonment charges during the quarter ended March 31, 2002. CRITICAL ACCOUNTING POLICIES AND ESTIMATES For the Company's critical accounting policies and estimates, refer to Official Payments' Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 29, 2002. There were no changes to the Company's critical accounting policies and estimates during the quarter ended March 31, 2002. RECENT EVENTS In late April 2002, the IRS awarded the Company a new contract to continue providing its electronic credit card payment services for an initial one-year term, with the IRS having the option to renew this new contract for four additional one-year terms. The IRS has informed the Company that it is one of two vendors who received this contract award. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement No. 141 "Business Combinations" (FAS 141), and Statement No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. FAS 141 also provides new criteria to determine whether an acquired intangible asset should be recognized separately from goodwill. Upon adoption of FAS 142, amortization of existing goodwill would cease and the remaining book value would be tested for impairment at least annually at the reporting unit level using a new two-step impairment test. Amortization of goodwill recorded on equity investments would also cease, but this embedded goodwill will continue to be tested for impairment under current accounting rules for equity investments. In addition, there would be adjustments to the equity in net income of affiliates line item to reflect the impact of adopting these Statements on the operations of equity investments. The Company adopted both Statements on January 1, 2002 and the Company did not have any intangible assets as March 31, 2002. The adoption of these Statements does not have a material effect on the Company's financial position or results of operations. In October 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets" (FAS 144). This Statement establishes a single accounting model, based on the framework established in FAS 121 "Accounting for the Impairment of Long-Loved Assets and for Long-Lived Assets to Be Disposed Of" for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposed transactions. The provisions of FAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company adopted FAS 144 on January 1, 2002 and the adoption does not have a material effect on the Company's financial position or results of operation. RESULTS OF OPERATIONS The following table sets forth, for the periods illustrated, certain statement of operations data expressed as a percentage of total revenues. The data has been derived from the unaudited financial statements contained in this report, which in management's opinion, have been prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods presented. The operating results for any period should not be considered indicative of the results for any future period. This information should be read in conjunction with the financial statements included in this report, as well as the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. STATEMENT OF OPERATIONS DATA: Three Months Ended March 31, ---------------------------- 2002 2001 -------- -------- Revenues........................................ 100% 100% Cost and expenses: Cost of revenues.............................. 72 80 Sales and marketing .......................... 24 68 Development costs............................. 20 30 General and administrative ................... 36 60 Depreciation expense.......................... 21 13 Amortization of deferred stock-based compensation................ - 565 ---------- -------- Total operating expenses...................... 173 816 ---------- -------- Loss from operations............................ (73) (716) Other income, net............................... 5 27 ---------- -------- Net loss........................................ (68)% (689)% ========== ======== COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 REVENUES Revenues. Revenues increased $844,000 to $4.3 million for the three months ended March 31, 2002 from $3.5 million for the three months ended March 31, 2001, an increase of 24%. This increase is primarily attributable to additional state and local clients and services added by the Company between March 31, 2001 and March 31, 2002, as well as increased revenues from the processing of additional state and local taxes for existing clients. Federal Transaction Revenues. Federal transaction revenues consist of fees earned in connection with processing payments related to personal federal balance-due, extension, estimated income, current-year delinquent tax and installment tax payments. Federal transaction revenues decreased approximately $86,000 to $1.56 million for the three months ended March 31, 2002 from $1.64 million for the three months ended March 31, 2001, a decrease of 5%. The decrease in revenues is primarily attributable to a decrease in payments processed to $62.7 million for the three months ended March 31, 2002 from $64.7 million for the three months ended March 31, 2001, a decrease of 3%. The decrease in the payments processed was primarily due to a 14% decrease in the average payment amount, offset by 11% increase in the number of transactions processed during the three months ended March 31, 2002. Based on recent economic reports in the media, the Company believes that the decrease in the average payment may be due, at least in part, to the recent economic downturn and its impact in lowering the overall amount of taxes individuals owed (for example, as a result of job layoffs and reductions or eliminations of job-related bonuses, capital gains and mutual funds distributions). For the three months ended March 31, 2002, the Company processed approximately 21,000 transactions, compared to approximately 19,000 transactions for the three months ended March 31, 2001. Federal transaction fees represented 36% of total revenues for the three months ended March 31, 2002, compared to 47% of total revenues for the three months ended March 31, 2001. State Transaction Revenues. Revenues from processing state payments are primarily related to state income tax payments for balance-due, extension, and estimated personal income taxes and sales and use tax payments (as the case may be) to the District of Columbia and the states of Alabama, Arkansas, California, Connecticut, Illinois, Indiana, Iowa, Kansas, Maryland, Minnesota, Mississippi, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, Virginia, Washington, West Virginia and Wisconsin. State transaction revenues increased $177,000 to $662,000 for the three months ended March 31, 2002 from $485,000 for the three months ended March 31, 2001, an increase of 36%. The increase in revenues is primarily related to additional state clients added by the Company between March 31, 2001 and March 31, 2002, as well as additional payment services provided to existing state clients. The Company processed tax payments for twenty-one states (and the District of Columbia) during the three months ended March 31, 2002, compared to thirteen states (and the District of Columbia) during the three months ended March 31, 2001. For the three months ended March 31, 2002, the Company processed approximately 51,000 transactions totaling $24.8 million, compared to approximately 16,000 transactions totaling $18.7 million for the three months ended March 31, 2001. Another factor contributing to the overall increase in state transaction revenues was an increase in the average convenience fee rate charged by the Company to 2.67% for the three months ended March 31, 2002 from 2.59% for the three months ended March 31, 2001, an increase of 3%. State transaction fees represented 15% of total revenues for the three months ended March 31, 2002 compared to 14% of total revenues for the three months ended March 31, 2001. Local Transaction Revenues. Local transaction revenues consist of fees earned in connection with processing payments for real estate and personal property taxes, traffic violations, parking citations, fax filing fees and utility bills for the Company's county and municipal clients. Local transaction revenues increased $700,000 to $2.1 million for the three months ended March 31, 2002 from $1.4 million for the three months ended March 31, 2001, an increase of 50%. Additional property tax and moving violation clients and an increase in the number of transactions processed for existing local government clients contributed to the overall increase in local transaction fees. For the three months ended March 31, 2002, the Company processed approximately 164,000 transactions totaling $60.3 million, compared to approximately 154,000 transactions totaling $37.2 million for the three months ended March 31, 2001. Revenues from processing real estate and personal property tax payments increased $696,000 to $1.3 million for the three months ended March 31, 2002 from $614,000 for the three months ended March 31, 2001, an increase of 113%. The increase is primarily attributable to an increase in the number of transactions processed and new county and municipal clients added during the first quarter of 2002. Revenues from processing fines for traffic violations, moving violations, utility bills and other transactions fees increased $24,000 to $732,000 for the three months ended March 31, 2002 from $708,000 for the three months ended March 31, 2001, an increase of 3%. Local transaction fees represented 47% of total revenues for the three months ended March 31, 2002 compared to 38% of total revenues for the three months ended March 31, 2001. Other Revenues. Other revenues during the three months ended March 31, 2002 consist of maintenance contract revenues. Other revenues increased $49,000 to $77,000 for the three months ended March 31, 2002 from $28,000 for the three months ended March 31, 2001. Other revenues represented 2% and 1% of total revenues for the three months ended March 31, 2002 and March 31, 2001, respectively. COST AND EXPENSES Cost of Revenues. Cost of revenues increased $300,000 to $3.1 million for the three months ended March 31, 2002 from $2.8 million for the three months ended March 31, 2001, an increase of 11%. The largest component of cost of revenues, merchant discount fees, increased $500,000 to $3.0 million for the three months ended March 31, 2002 from $2.5 million for the three months ended March 31, 2001, an increase of 20%. The cost of Internet and telecommunication charges for the Company's Internet and IVR platforms decreased $161,000 to $102,000 for the three months ended March 31, 2002 from $263,000 for the three months ended March 31, 2001, a decrease of 61%. The decrease is primarily attributable to lower rates negotiated with one of the Company's telecommunications carriers and a higher percentage of transactions processed through the Company's Internet platform, which involves a lower per transaction cost than the IVR. Other cost of transaction fees decreased $10,000 to $32,000 for the three months ended March 31, 2002 from $42,000 for the three months ended March 31, 2001, a decrease of 24%. Cost of revenues was 72% of total revenues for the three months ended March 31, 2002, compared to 80% for the three months ended March 31, 2001. Sales and Marketing. Sales and marketing expenses decreased $1.4 million to $1.0 million for the three months ended March 31, 2002 from $2.4 million for the three months ended March 31, 2001, a decrease of 58%. This decrease was primarily attributable to a planned reduction by the Company in television, radio and publication advertising expense of approximately $1.1 million compared to the prior year period. In addition, the Company will receive a total of $900,000 in cooperative advertising funds from four of its credit card partners for use in the Company's 2002 April tax season, of which $150,000 was applied against sales and marketing expenses during the quarter ended March 31, 2002. The remaining cooperative advertising funds will be applied to reduce sales and marketing expenses during the quarter ended June 30, 2002. For the 2001 April tax season advertising campaign, the Company received $515,000 in cooperative advertising funds, none of which the Company used during the quarter ended March 31, 2001. Sales and marketing expenses represented 24% of total revenues for the three months ended March 31, 2002, compared to 68% for the three months ended March 31, 2001. Development Costs. Development costs decreased $124,000 to $876,000 for the three months ended March 31, 2002 from $1.0 million for the three months ended March 31, 2001, a decrease of 12%. The decrease is primarily attributable to a reduction in engineering personnel and related salary costs as a result of the corporate restructuring that the Company initiated in November 2001. Development costs represented 20% of total revenues for the three months ended March 31, 2002 compared to 30% for the three months ended March 31, 2001. General and Administrative. General and administrative expenses decreased $500,000 to $1.6 million for the three months ended March 31, 2002 from $2.1 million for the three months ended March 31, 2001, a decrease of 24%. This decrease is mainly attributable to a decrease in personnel expenses of $111,000, a decrease in legal and consulting expenses of $110,000, a decrease in other employee related expenses of $109,000, and a decrease in insurance expenses of $53,000. General and administrative expenses represented 36% of total revenues for the three months ended March 31, 2002 compared to 60% for the three months ended March 31, 2001. Depreciation Expense. Depreciation expense increased $473,000 to $927,000 for the three months ended March 31, 2002 from $454,000 for the three months ended March 31, 2001, an increase of 104%. The increase is primarily related to the purchase of computer equipment, as well as an increase in software and development expenses related to adding functionality to the Company's Web site. Depreciation expense represented 21% of total revenues for the three months ended March 31, 2002 compared to 13% for the three months ended March 31, 2001. Amortization of deferred stock-based compensation. The Company did not have any amortization of deferred stock-based compensation during the quarter ended March 31, 2002 compared to $19.8 million for the three months ended March 31, 2001. The Company fully amortized the remaining $19.8 million of deferred stock-based compensation in January 2001, when employee stock options (for which the original expense charge had been taken) became fully vested as a result of Comerica Incorporated's acquisition of Imperial Bancorp, the parent of the Company's majority controlling stockholder (thereby effectuating a change in control of the Company). Prior to the Comerica/Imperial transaction, the Company expected to amortize the deferred stock-based compensation quarterly through the second quarter of 2002. Amortization of deferred stock-based compensation represented 565% of total revenues for the three months ended March 31, 2001. OTHER INCOME, NET Other income, net, consists of interest income, interest expense and other non-operating expenses. Other income, net, decreased by $728,000 to $221,000 for the three months ended March 31, 2002 compared to $949,000 in other income, net for the three months ended March 31, 2001, a decrease of 77%. This decrease is directly related to lower interest income resulting from lower average cash balances and a lower average interest rate earned during the recent period, as compared to the first quarter of fiscal year 2001. LIQUIDITY AND CAPITAL RESOURCES In November 1999, the Company completed the initial public offering of its common stock and realized net proceeds from the offering of approximately $78.7 million. Prior to the offering the Company had financed its operations through private sales of common stock, with net proceeds of $1.2 million, and through bank and shareholder loans. As of March 31, 2002, the Company had $45.3 million in cash and short term investments, and $40.9 million in working capital. Net cash used in operating activities was $4.0 million for the three months ended March 31, 2002, and during the same period prior year, net cash of $1.8 million was provided by operating activities. The cash used in operating activities for the three months ended March 31, 2002 was primarily attributable to the Company's net loss, an increase in accounts receivable and decrease in restructuring obligations, offset by depreciation, an increase in accounts payable and accrued expenses. The cash provided by operating activities for the three months ended March 31, 2001 was primarily attributable to the Company's net loss, offset by non-cash operating expenses (such as amortization of deferred stock-based compensation and depreciation) and an increase in accounts payable and accrued expenses. Net cash provided by investing activities was $2.3 million and $2.8 million for the three months ended March 31, 2002 and 2001, respectively. For 2002, cash from investing activities primarily reflects proceeds from the sale of short-term investments. For 2001, cash from investing activities primarily reflects proceeds from the sale of short-term investments, offset by purchase of property and equipment. Net cash provided by financing activities was $239,000 and $517,000 for the three months ended March 31, 2002 and 2001, respectively. The cash generated in the three months ended March 31, 2002 and March 31, 2001 is primarily related to the exercise of stock options by the Company's former and current employees offset by repayment of capital lease obligations. The Company believes that, based on its current business plan, existing cash and investments will be sufficient to meet operating activities, capital expenditures and other obligations for at least the next two years. The Company's capital and liquidity requirements depend on, and may be materially and adversely by numerous factors, including: consumer utilization of its services (which may be affected by general changes in overall consumer spending and general economic conditions), merchant discount fees charged by credit card companies, economic conditions impacting the Company's revenue generation (including, without limitation, the effect of such conditions on the amount of taxes payable by citizens), the resources that the Company devotes to developing, marketing, selling and supporting its services, the resources the Company commits to technological development and infrastructure and the cost of investment in complementary businesses, technologies, or other strategic business transactions. Other factors affecting the Company's business are described in the 2001 Form 10-K under "ITEM 1. BUSINESS - Other Factors Affecting the Company's Business." SEASONALITY AND FLUCTUATION OF QUARTERLY RESULTS The Company has generally experienced fiscal quarter-over-fiscal quarter revenue growth with some seasonal fluctuations, primarily in the second quarter. The fiscal quarter-over-fiscal quarter revenue growth is due to an increase in the number of government clients and payment services and an increase in the rates of consumer utilization of the Company's services. Normally, the Company experiences larger revenues in the second quarter, which are the result of the Company processing personal federal and state balance-due income tax payments in the month of April. The Company expects that results for the second quarter of future years will continue to be impacted by the April 15th deadline for paying personal federal and state income taxes. In addition, the Company's revenues are also impacted by the timing of federal and state estimated personal income tax payments (which are made quarterly) and local property tax payments (which are made only once or twice per year in many jurisdictions). Currently, the Company expects its operating expenses to decline as a result of a decrease in personnel, marketing, technological and other infrastructure costs as the Company continues to implement its corporate restructuring plan. If revenues in any quarter do not increase corresponding with increases in operating expenses, the Company's results for that quarter would be materially and adversely affected. For the foregoing reasons, the Company believes that comparisons of its quarterly operating results are not necessarily meaningful and that the Company's operating results in any particular quarter should not be relied upon as necessarily indicative of future performance. In addition, it is possible that in some future quarters the Company's operating results will be below the expectations of research analysts and investors, and in that case, the price of the Company's common stock is likely to decline. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The primary objective of the Company's investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified investments, consisting primarily of investment grade securities. Due to the nature of the Company's investments, the Company believes that there is no material risk exposure. As of March 31, 2002, the Company had short-term investments of $43.2 million. The Company classifies its short-term investments as "available-for-sale." Financial instruments classified as short-term investments include government securities and commercial paper (with a Standard and Poor's rating of A-1 or better), with maturity dates of generally less than twelve months. Such short-term investments are recorded at fair value, with unrealized holding losses reported as a separate component of Stockholders' equity. As of March 31, 2002, the unrealized holding losses were $41,000. The table below represents principal amounts and related weighted-average interest rates by year of maturity for the Company's investment portfolio.
FY2002 FY2003 FY2004 FY2005 FY2006 Thereafter Total ------ ------ ------ ------ ------ --------- ------ Cash $ 2,097 $ - $ - $ - $ - $ - $ 2,097 Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Short-term Investments $43,214 $ - $ - $ - $ - $ - $43,214 Average interest rate 2.23% 0.00% 0.00% 0.00% 0.00% 0.00% ------- ------- ------ ------ ------ --------- ------ Total cash and Investments $45,311 $ - $ - $ - $ - $ - $45,311 ====== ====== ====== ====== ====== ========= ======
PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company currently is not involved in any material legal proceedings. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On November 29, 1999, the Company completed the initial public offering of its common stock. The managing underwriters in the offering were Donaldson, Lufkin, & Jenrette, CIBC World Markets and DLJdirect Inc. The shares of the common stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (No. 333-87325). The Securities and Exchange Commission declared the Registration Statement effective on November 22, 1999. The offering commenced on November 23, 1999 and was completed on November 29, 1999 after the Company had sold all of the 5,750,000 shares of common stock registered under the Registration Statement (including 750,000 shares sold in connection with the exercise of the underwriters' over-allotment option). The initial public offering price was $15.00 per share, resulting in gross proceeds from the initial public offering of $86.2 million. The Company paid a total of $6.0 million in underwriting discounts and commissions and approximately $1.5 million has been incurred for costs and expenses related to the offering. None of the costs and expenses related to the offering were paid directly or indirectly to any director or officer of the Company or their associates, persons owning 10 percent or more of any class of equity securities of the Company or an affiliate of the Company. After deducting the underwriting discounts and commissions and the offering expenses, the estimated net proceeds to the Company from the offering were approximately $78.7 million. The net offering proceeds have been used, in addition to general corporate purposes, to make the following payments: approximately $2.3 million for the purchase and installation of computer equipment to expand transaction processing capabilities; approximately $6.5 million to develop and add functionality to its Web site; approximately $1.6 million for the build-out of the Company's headquarters in Stamford, Connecticut and expansion of its leased office space in San Ramon, California; and approximately $8.5 million for direct marketing and promotional activities. The Company paid $135,000 and $151,000 to Imperial Bank (then the record holder of a majority of the Company's outstanding common stock) in 2000 and 1999, respectively, for the provision of certain general administrative services. Through March 31, 2002, in connection with the primary insurance coverage provided to the Company by unaffiliated insurance companies as part of Comerica Incorporated's master policies, the Company incurred approximately $73,000 of premiums payable to Comerica Assurance Ltd., another Comerica subsidiary, for insurance on certain deductibles which otherwise would be payable by the Company in the event of casualty losses under these master policies. Except as described in the preceding sentence, none of the net offering proceeds have been paid directly or indirectly to any director or officer of the company or their associates, persons owing 10% or more of any class of equity securities of the Company or an affiliate of the Company. In the future, the Company may use a portion of its net proceeds to acquire or invest in businesses, technologies, products or services (which amount has not been specifically allocated as of the date hereof). Unused proceeds are invested in short-term investments. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the three months ended March 31, 2002, there were no matters submitted to a vote of security holders through a solicitation of proxies or otherwise. ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibit Index (b) Reports on Form 8-K None SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OFFICIAL PAYMENTS CORPORATION May 14, 2002 By: /s/ Thomas R. Evans --------------------------- Thomas R. Evans Chairman of the Board and Chief Executive Officer May 14, 2002 By: /s/ Edward J. DiMaria --------------------------- Edward J. DiMaria Chief Financial Officer (Principal Financial and Accounting Officer) INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION ======== ====================================== 10.1 Contract between Internal Revenue Service and the Registrant, dated as of April 30, 2002. EX-10.1 3 ex10pt1.txt ================================================================================================================================= SOLICITATION/CONTRACT/ORDER FOR COMMERCIAL ITEMS 1. REQUISITION NUMBER PAGE 1 OF 39 OFFEROR TO COMPLETE BLOCKS 12, 17, 23, 24, & 30 2. CONTRACT NO. 3. AWARDS/EFFECTIVE 4. ORDER NUMBER 5. SOLICITATION NUMBER 6. SOLICITATION ISSUE TIRNO-02-C-00022 DATE DATE 8/24/2001 7. FOR SOLICITATION a. NAME b. TELEPHONE NUMBER (No collect 8. OFFER DUE DATE/ INFORMATION CALL: Alycia Dougans Taylor calls) 202-283-1317 LOCAL TIME - --------------------------------------------------------------------------------------------------------------------------------- 9. ISSUED BY CODE irs0088 10. THIS ACQUISITION IS 11. DELIVERY FOR 12. DISCOUNT TERMS FOB DESTINATION INTERNAL REVENUE SERVICE [X]UNRESTRIC1ED UNLESS BLOCK IS IRS PROCUREMENT Suite 500 [ ]SET ASIDE: % FOR MARKED 6009 OXON HILL ROAD [ ]SMALL BUSINESS [ ]SEE SCHEDULE OXON HILL, MD 20745 [ ]SMALL DISAV. BUSINESS ------------------------------------------------ [ ]8(A) [ ] 13a. THIS CONTRACT IS A RATED SIC: ORDER UNDER DPAS (15 CFR 700) SIZE STANDARD: 18.0 ------------------------------------------------ 13b. RATING ------------------------------------------------ 14. METHOD OF SOLICITATION [ ]RFQ [ ]IFB [ ]RFP - --------------------------------------------------------------------------------------------------------------------------------- 15. DELIVER TO CODE lRS0088 16. ADMINISTERED BY CODE IRS0088 IRS, OP: ETA:E INTERNAL REVENUE SERVICE Attn: Linda Rickard, C4-332 NCFB IRS PROCUREMENT Suite 500 5000 Ellin Road 6009 OXON HILL ROAD Lanham, MD 20706 OXON HILL, MD 20745 - --------------------------------------------------------------------------------------------------------------------------------- 17a. CONTRACTOR/ CODE FACILITY 18a. PAYMENT WILL BE MADE BY CODE INV0830 OFFEROR code OFFICIAL PAYMENTS CORPORATION IRS Beckley Finance Center Steve R. Johnson PO BOX 9002 2333 SAN RAMON VALLEY BLVD. #450 TELEPHONE # (304) 256-6000 SAN RAMON, CA 94553 BECKLEY, WV 25802 TELEPHONE NO. (925) 855-5040 - --------------------------------------------------------------------------------------------------------------------------------- [ ]17b. CHECK IF REMITTANCE IS DIFFERENT AND 18b. SUBMIT INVOICES TO ADDRESS SHOWN IN BLOCK 18a UNLESS BLOCK BELOW PUT SUCH ADDRESS IN OFFER IS CHECKED [ ]SEE ADDENDUM - --------------------------------------------------------------------------------------------------------------------------------- 19. 20. 21. 22. 23. 24. ITEM NO. SCHEDULE OF SUPPLIES/SERVICES QUANTITY UNIT UNIT PRICE AMOUNT - --------------------------------------------------------------------------------------------------------------------------------- See Section B (Attach Additional Sheets as Necessary) - --------------------------------------------------------------------------------------------------------------------------------- 25. ACCOUNTING AND APPROPRIATION DATA 26. TOTAL AWARD AMOUNT (For Govt. Use Only) 0.00 - --------------------------------------------------------------------------------------------------------------------------------- [ ]27a. SOLICITATION INCORPORATED BY REFERENCE FAR 52.212-1, 52.212-4. FAR 52.212-3 AND 52.212-5 ARE ATTACHED. [X]ARE [ ]ARE NOT ATTACHED [ ]27b. CONTRACT/PURCHASE ORDER INCORPORATES BY REFERENCE FAR 52.212-4, FAR IS ATTACHED, ADDENDA [ ]ARE [ ]ARE NOT ATTACHED - --------------------------------------------------------------------------------------------------------------------------------- 28. CONTRACTOR IS REQUIRED TO SIGN THIS DOCUMENT AND RETURN 5 COPIES 29. AWARD OF CONTRACT: REFERENCE _______________ OFFER [X] TO ISSUING OFFICE. CONTRACTOR AGREES TO FURNISH AND DELIVER ALL ITEMS [ ] DATED _________. YOUR OFFER ON SOLICITATION SET FORTH OR OTHERWISE IDENTIFIED ABOVE AND ON ANY ADDITIONAL SHEETS (BLOCK 5), INCLUDING ANY ADDITIONS OR CHANGES SUBJECT TO THE TERMS AND CONDITIONS SPECIFIED HEREIN. WHICH ARE SET FORTH - ---------------------------------------------------------------------------------------------------------------------------------- 30a. SIGNATURE OF OFFEROR/CONTRACTOR 31a. UNITED STATES OF AMERICA(SIGNATURE OF CONTRACTING OFFICER) /s/ THOMAS R. EVANS /s/ Alycia Dougans Taylor - --------------------------------------------------------------------------------------------------------------------------------- 30b. NAME AND TITLE OF SIGNER (Type of print) 30c. DATE SIGNED 31b. NAME OF CONTRACTING 31c. DATE SIGNED OFFICER (Type of print) THOMAS R. EVANS 4/15/02 Alycia Dougans Taylor (202)283-1317 4/30/02 CEO - --------------------------------------------------------------------------------------------------------------------------------- 32a. QUANTITY IN COLUMN 21 HAS BEEN 33. SHIP NUMBER 34. VOUCHER NUMBER 35. AMOUNT VERIFIED CORRECT FOR [ ]RECEIVED [ ]INSPECTED [ ]ACCEPTED, AND CONFORMS TO THE [ ]PARTIAL [ ]FINAL CONTRACT, EXCEPT AS NOTED - --------------------------------------------------------------------------------------------------------------------------------- 36. PAYMENT 37. CHECK NUMBER 32b. SIGNATURE OF AUTHORIZED GOVT. 32c. DATE [ ]COMPLETE [ ]PARTIAL [ ]FINAL REPRESENTATIVE 38. S/R ACCOUNT NUMBER 39. S/R VOUCHER NUMBER 40. PAID BY - --------------------------------------------------------------------------------------------------------------------------------- 41a. I CERTIFY THIS ACCOUNT IS CORRECT AND PROPER FOR PAYMENT 42a. RECEIVED BY (Print) ------------------------------------------ 41b. SIGNATURE AND TITLE OF CERTIFYING OFFICER 41c. DATE 42b. RECEIVED AT (Location) ------------------------------------------ 42c. DATE REC'D 42d. TOTAL CONTAINERS (YY/MM/DD) ================================================================================================================================= AUTHORIZED FOR LOCATION REPRODUCTION SEE REVERSE FOR OMB STANDARD FORM 1449(10-95) CONTROL NUMBER AND =================================================================================================================================
TIRNO-02-C-00022 2 SECTION B - CONTRACT PRICING B.1 CONTRACT TYPE This is a FIRM FIXED PRICE CONTRACT for the requirements described in Section C. B.2 CONTRACT PRICING B.2.1 BASE PERIOD CLIN DESCRIPTION PRICE 0001 Electronic Payments $0 0002 Transaction Processing Network Documentation $0 0003 Capacity Analysis $0 0004 Computer Security Plan/Guide $0 0005 Configuration Management Plan $0 0006 Risk Assessment Plan $0 0007 Disaster Recovery Plan $0 0008 Network Design and Architecture Schematic $0 0009 Test Plans and Test Reports $0 0010 Functional Requirements/User Interface Documentation $0 0011 Scripts, User Interface Screens and General User Information Materials $0 0012 Process and Data Flow Schematic $0 0013 System Administrator Manual $0 0014 Work Breakdown Structure/Schedule $0 0015 Monthly Development Status Reports $0 0016 Daily Transaction Reports $0 0017 Monthly Transaction Reports $0 0018 Chargeback Reports $0 0019 Ad Hoc Reports $0 0020 Incident Reports $0 0021 Findings Reports $0 0022 Marketing Reports $0 TOTAL FIRM FIXED PRICE $0 -- B.2.2 OPTION 1 CLIN DESCRIPTION PRICE 1001 Electronic Payments $0 1002 Transaction Processing Network Documentation $0 1003 Capacity Analysis $0 1004 Computer Security Plan/Guide $0 1005 Configuration Management Plan $0 1006 Risk Assessment Plan $0 1007 Disaster Recovery Plan $0 1008 Network Design and Architecture Schematic $0 1009 Test Plans and Test Reports $0 1010 Functional Requirements/User Interface Documentation $0 1011 Scripts, User Interface Screens and General User Information Materials $0 1012 Process and Data Flow Schematic $0 1013 System Administrator Manual $0 1014 Work Breakdown Structure/Schedule $0 1015 Monthly Development Status Reports $0 1016 Daily Transaction Reports $0 1017 Monthly Transaction Reports $0 1018 Chargeback Reports $0 1019 Ad Hoc Reports $0 1020 Incident Reports $0 1021 Findings Reports $0 1022 Marketing Reports $0 TOTAL FIRM FIXED PRICE $0 B.2.3 OPTION 2 CLIN DESCRIPTION PRICE 2001 Electronic Payments $0 2002 Transaction Processing Network Documentation $0 2003 Capacity Analysis $0 2004 Computer Security Plan/Guide $0 2005 Configuration Management Plan $0 2006 Risk Assessment Plan $0 2007 Disaster Recovery Plan $0 2008 Network Design and Architecture Schematic $0 2009 Test Plans and Test Reports $0 2010 Functional Requirements/User Interface Documentation $0 2011 Scripts, User Interface Screens and General User Information Materials $0 2012 Process and Data Flow Schematic $0 2013 System Administrator Manual $0 2014 Work Breakdown Structure/Schedule $0 2015 Monthly Development Status Reports $0 2016 Daily Transaction Reports $0 2017 Monthly Transaction Reports $0 2018 Chargeback Reports $0 2019 Ad Hoc Reports $0 2020 Incident Reports $0 2021 Findings Reports $0 2022 Marketing Reports $0 TOTAL FIRM FIXED PRICE $0 -- B.2.4 OPTION 3 CLIN DESCRIPTION PRICE 3001 Electronic Payments $0 3002 Transaction Processing Network Documentation $0 3003 Capacity Analysis $0 3004 Computer Security Plan/Guide $0 3005 Configuration Management Plan $0 3006 Risk Assessment Plan $0 3007 Disaster Recovery Plan $0 3008 Network Design and Architecture Schematic $0 3009 Test Plans and Test Reports $0 3010 Functional Requirements/User Interface Documentation $0 3011 Scripts, User Interface Screens and General User Information Materials $0 3012 Process and Data Flow Schematic $0 3013 System Administrator Manual $0 3014 Work Breakdown Structure/Schedule $0 3015 Monthly Development Status Reports $0 3016 Daily Transaction Reports $0 3017 Monthly Transaction Reports $0 3018 Chargeback Reports $0 3019 Ad Hoc Reports $0 3020 Incident Reports $0 3021 Findings Reports $0 3022 Marketing Reports $0 TOTAL FIRM FIXED PRICE $0 -- B.2.5 OPTION 4 CLIN DESCRIPTION PRICE 4001 Electronic Payments $0 4002 Transaction Processing Network Documentation $0 4003 Capacity Analysis $0 4004 Computer Security Plan/Guide $0 4005 Configuration Management Plan $0 4006 Risk Assessment Plan $0 4007 Disaster Recovery Plan $0 4008 Network Design and Architecture Schematic $0 4009 Test Plans and Test Reports $0 4010 Functional Requirements/User Interface Documentation $0 4011 Scripts, User Interface Screens and General User Information Materials $0 4012 Process and Data Flow Schematic $0 4013 System Administrator Manual $0 4014 Work Breakdown Structure/Schedule $0 4015 Monthly Development Status Reports $0 4016 Daily Transaction Reports $0 4017 Monthly Transaction Reports $0 4018 Chargeback Reports $0 4019 Ad Hoc Reports $0 4020 Incident Reports $0 4021 Findings Reports $0 4022 Marketing Reports $0 TOTAL FIRM FIXED PRICE $0 SECTION C - CONTRACT TERMS AND CONDITIONS C.1 STATEMENT OF WORK C.1.1 INTRODUCTION As authorized by the Taxpayer Relief Act of 1997, the Federal Government can accept internal revenue taxes via any commercially acceptable means. The law permits the Government to enter into contracts to obtain services related to receiving payment by other means where cost beneficial to the Government. However, the law specifies that the Government may not pay any fee or provide any other monetary consideration under such contracts. The purpose of this contract is to implement convenient, inexpensive and trusted payment methods that allow taxpayers to electronically pay taxes. Such payment methods shall encourage taxpayers to electronically pay the balance due on tax returns, forms and other remittance transactions. C.1.2 SCOPE AND OBJECTIVE This is a "commercial item" acquisition, as that term is defined in the Federal Acquisition Regulations (FAR) 2.101. The Contractor shall provide an electronic credit card payment system and conduct a program that allows taxpayers to make federal tax payments by means of an Interactive Voice Response (IVR) application and Internet application, respectively. The Contractor shall accept credit card payments for individual income taxes. The Contractor may also accept credit card payments for business balance due taxes in the option years as approved by the Government. The Contract has one base year (filing season 2003), which expires in May 2003, and four, 12-month option years that may extend the contract period of performance through filing season 2007. C.1.3. OBJECTIVE The Contractor shall provide credit card payment services that simplify payment transactions for taxpayers. The Contractor shall provide electronic payment options that are (1) convenient, safe and secure and (2) are an outgrowth of the e-file program. The Contractor shall ensure its approach minimizes cost to the taxpayer and ensure privacy and security. The contracted services shall reduce governmental costs and improve cash flow to the federal government. C.2 CONTRACT REQUIREMENTS The Contractor shall provide an electronic payment system that allow taxpayers to make federal tax payments through convenient, safe and secure means, which will also reduce governmental costs and improve cash flow to the federal government. By way of IVR and Web applications, respectively, the Contractor shall accept VISA, American Express Card, Discover Card and MasterCard cards for the payment of federal taxes and confirm the validity of the credit card number and the four- or six-digit expiration date prior to the completion of the transaction. The Contractor shall ensure that certain edits and actions are performed to authenticate the validity of taxpayer information or otherwise ensure that the federal tax payment will be applied accurately and as intended by the taxpayer. The Contractor shall provide a unique electronic acknowledgement or confirmation of payment completion to the taxpayer. The Contractor may charge taxpayers a traditional "merchant fee" for the convenience of the payment service including real-time electronic authorization and transmission of the payment. For payments of $40.00 or more, a flat rate convenience fee shall be charged equaling 2.5% of the tax payment. For payments under $40.00, the convenience fee shall equal $1.00. The Contractor shall inform the taxpayer of all fees related to the payment and provide an opportunity to accept or decline the fees and terminate the transaction prior to completion. In the event that other companies are subcontracted to participate in the program, the Contractor shall negotiate with the sub-contractors to minimize all fees or surcharges assessed. The Contractor shall collect and disburse all such fees from the cardholder and post all charges to the cardholder's account. C.2.1 DUTIES AND RESPONSIBILITIES OF THE CONTRACTOR The Contractor's duties and responsibilities during the term of this contract are to: 1. Provide a system that accepts Forms 1040 (current year balance due), 1040 (current year past due), 1040 (Installment Agreement), 4868 (extension) and 1040-ES (estimated) federal tax payments. As proposed, the Contractor shall: a. Accept Form 1040 (current year balance due) payments from January 10, 2003 through the end of the base year period of performance. If the option year is exercised, the processing period will extend through December 15, 2003. b. Accept Form 1040 (current year past due) payments from May 1, 2003 through the end of the base year period of performance. If the option year is exercised, the processing period will extend through December 15, 2003. c. Accept Form 1040 (Installment Agreement) payments for tax year 1999 and after from January 10, 2003 through the end of the base year period of performance period. If the option year is exercised, the processing period will extend through January 31, 2004. d. Accept Form 1040-ES (Estimated Tax) payments from March 1, 2003 through the end of the base year period of performance. If the option year is exercised, the processing period will extend through January 31, 2004. e. Accept Form 4868 (Extension) payments from January 10, 2003 through the end of the base year period of performance. If the option year is exercised, the processing period will extend through June 18, 2003. f. Accept the above-named payment types from both domestic and international federal taxpayers. g. Prompt taxpayers to enter necessary data items, beginning with the payment amount. Users shall be prompted to verify entered data and accept terms of payment including the convenience fee. h. Provide redundant systems to ensure complete data reliability as well as system availability. i. Provide users access to toll-free automated and live customer service support. Users can also obtain information via on-line frequently asked questions and by e-mail. 2. Provide federal taxpayers 24 hour x 7 days a week access to electronic payment options and networks employed by the Contractor beginning on January 10, 2003 at a rate equal to or exceeding 95% availability in any given calendar month. This includes the total number of customers successfully accessing the Contractor's electronic transaction network on the first attempt compared to the total number of attempts as well as overall on-line availability during the month. However, taxpayers must have access to electronic payment options at a rate of 95% (or higher) availability on any given day during peak processing periods. Depending on the types of payments accepted, peak processing periods may include, but is not limited to, the seven-day period ending on the 15th (or next business day if the 15th falls on a holiday or weekend) of January, April, June and September of each year. 3. Exercise best practices and industry standards for preparing and maintaining systems and application documentation. 4. Provide documentation to the Government (with "limited rights" as defined in the "Rights in Data" clause in Section C.12.1), before the program commences, of the transaction processing networks employed in the program and the network's interfaces. Documentation requirements include, but are not limited to, network design and architecture, capacity analysis, risk assessment, disaster recovery plan, configuration management plan and information security plan. Configuration control and management shall be exercised and documented as system/functionality changes occur. 5. Provide documentation to the Government (with "limited rights" as defined in the "Rights in Data" clause in Section C.12.1) before the program commences, of application test plan, and test reports and certification. 6. Provide draft functional requirements and user interface documentation to the Government, including but not limited to interactive voice response system scripts, web pages, desktop software input and information screens, application design and architecture schematics (describing work processes and data flow from payment initiation through completion) and outputs (reports, etc.), for review and approval before the program commences. 7. Provide necessary systems and data accesses to the Government's representative performing independent verification and validation (IV&V) reviews of system's readiness (including, but not limited to, applications testing, stress testing, vulnerability testing and security testing). In addition to the documentation listed above, a trusted facility manual (systems administrator manual) will be a key component of the IV&V review. The IV&V Review will be based on IRS computer security policy and guidance (as described in the applicable Internal Revenue Manual and subsequent revisions) as well as best practices and industry standards. 8. Provide an accuracy rate of 99% or higher for all transmitted transaction data as provided by the taxpayer. This includes accuracy of electronic payment data forwarded to the Service by the Contractor that may result from intermediate actions taken by the Contractor necessary for coding, applying, and transmitting payment data. 9. Implement systems controls to prevent duplicate payments that might result from multiple transmissions of a settlement file or other errors resulting from the completion and transmission of identical payment transactions. Duplicate payments caused by insufficient system controls will adversely impact the Contractor's accuracy rate. 10. Minimize duplicate and erroneous payment opportunities by establishing limits on the number of payments that can be made per taxpayer per tax type in accordance with IRS guidelines. An integrated database that centrally regulates such limitations, independent of the payment channel, e.g., IVR or Web, shall be used. 11. Inform taxpayers of the dollar amounts of all fees related to the payment transaction and obtain taxpayers' acknowledgement or acceptance of fees prior to completing any payment transactions. The Government shall be notified of the method of obtaining taxpayers' acknowledgement or acceptance of fees, and shall approve the method before the program commences. 12. Provide taxpayers with confirmation of payment transactions through the payment means (for example, IVR, Internet, etc.) used to complete the payment or by way of some other commonly acceptable means. 13. Provide taxpayers, upon request, with IRS general information (such as a brochure) regarding electronic payment options in an easily accessible manner such as printed materials or through hyperlinks on the Web. 14. Provide incident reports of any material network outages, work stoppages, or other payment processing problems. This includes but is not limited to systemic problems related to authorizing credit on-line and human errors that result in duplicate payments or non-payment. Outages and stoppages in excess of one hour are considered to be material in nature. The Contractor shall inform the Contracting Officer's Technical Representative (COTR) of all incidents within 24 hours of occurrence or awareness, and shall provide an incident report within 5 business days. Incident reports shall include a description of the incident, the cause, number of taxpayers impacted, duration of the incident, and actions taken by the Contractor to remedy the incident. 15. Comply with the Credit Card Bulk Filer Requirements. This will require the completion of integrated readiness testing with IRS and Treasury Financial Agents' (TFA) systems (includes use of simulated payment data on test systems and production systems). 16. Convert payment transactions to Automated Clearing House (ACH) debit authorizations and settle funds through the Government's designated TFA. Any adjustments necessary because of failure to correctly verify and validate payment information shall be the responsibility of the Contractor. The TFA shall initiate one bulk debit daily to the account established for this purpose. 17. Settle funds through the TFA. Funds for MasterCard and VISA transactions will settle within 48 hours of payment authorization. Funds for American Express and Discover transactions will settle within 72 hours of payment authorization. Any funds held overnight from one business day to the next business day shall be subject to U.S. Treasury penalties and interest. 18. Forward settlement files to the TFA one business day prior to settlement. 19. Secure entity validation prior to forwarding settlement files to the TFA. The Contractor must establish processes to inform users that an entity (Social Security Number or Taxpayer Identification Number) reject occurred. 20. Provide settled funds where the payment (transaction) date is less than 11 days prior to the settlement date. In the event that funds settlement is delayed beyond this period due to a reject condition, such as invalid entity, the payment must be re-initiated and the new payment date submitted for posting. 21. Provide only guaranteed payments to the Government for federal taxes owed. 22. Retain credit card authorization logs for 72 months from the date of each transaction. The information in such logs shall include, transaction type, date and time, credit card account number, amount of transaction, and approval/confirmation number. This requirement shall survive the life of this contract, and the Government shall have the right to inspect such logs upon reasonable notice to the Contractor. 23. Comply with Section 6311, Payment by Credit Card and Debit Card, of the Internal Revenue Code (IRC) and any subsequent updates and revisions. 24. In accordance with the Section C.2.4, make reasonable efforts to complete any necessary modifications to software, systems, and services in accordance with its commercial business practices to conform to the provisions of IRS regulations promulgated under U.S.C. 6311 (d)(1). This contract is considered modified automatically to incorporate by reference the current provisions of such regulations during the life of this contract. 25. Maintain the confidentiality of any information relating to electronic payment transactions with absolutely no disclosure or use except to the extent authorized by written procedures promulgated by the IRS pursuant to 26 U.S.C. 6311(e)(3). 26. Maintain the confidentiality of any information relating to Federal/State electronic payment transactions completed in a single transaction. This includes absolutely no disclosure or use of information collected during this transaction for any purpose other than processing the transaction to the U.S. Treasury or appropriate State. Information collected during the transaction shall not be disclosed or used for any purpose prohibited by law and the Internal Revenue Code. 27. Pay any and all transaction fees to subcontractors related to the completion of the payment transaction. 28. Provide a merchant descriptor on the taxpayer's card statement describing the tax payment amount as a unique line item entitled "U S Treasury Tax Payment". 29. Provide a merchant descriptor on the taxpayer's card statement describing the transaction fee amount as a unique line item. 30. Provide a Work Breakdown Schedule (WBS), using Project Management software, covering the systems development life cycle and update the WBS regularly to reflect current task status. 31. Conduct post implementation review of live application including production monitoring, reporting, user/non-user surveys and user free form comments. 32. Actively encourage and promote use of electronic payment product(s). 33. Provide a Marketing Plan and deliverables that support and facilitate public awareness of IRS e-file and electronic payments. The Marketing Plan should describe planned marketing products and/or tools, targeted audience and distribution timeline. The Plan shall also describe (1) any planned use of IRS e-file key messages and/or logo on marketing products; (2) defined measures for success; (3) method for tracking the number of unique taxpayers that pay electronically as a result of deliverables, and (4) marketing reports (as described in Section C.2.3.7). All marketing products shall be provided to the Government in draft for review and approval at least 3 business days prior to the due date. Also, refer to C.11 regarding public release of information. C.2.2 DUTIES AND RESPONSIBILITIES OF THE GOVERNMENT The Government's, that is, the Internal Revenue Service's, duties and responsibilities during the term of this contract are to: 1. Provide electronic record specifications necessary for funds settlement and posting of tax data related to the electronic payment transactions. 2. Designate Treasury Financial Agent(s) to act on the Government's behalf for settlement of funds in payment of taxes owed. 3. Provide required reporting formats. 4. Provide an electronic copy of the Electronic Payments Brochure, which is required to be made available to taxpayers via electronic means. 5. Provide no monetary consideration to the Contractor for electronic payment transactions. 6. Process credit card chargeback actions in accordance with its written procedures. This shall include reimbursing the Contractor for unauthorized or erroneous charges that are substantiated by the cardholder and approved by the Contractor's duly authorized management representative. The Contractor must have completed and delivered the appropriate IRS chargeback form and supporting documentation to the IRS as described in IRS chargeback procedures. Such chargeback requests shall be processed based on the Contractor's determination of the appropriateness of this action as signified by its authorized claimant's signature. In the event, the IRS notifies the Contractor of duplicate payments that may be subject to chargeback action, it is incumbent upon the Contractor to research the nature of the duplicate payment and timely initiate the appropriate action. 7. Complete annual Contractor Performance Report based on standard evaluation criteria (such as quality of product or service; timeliness of performance; and business relations) used throughout the Agency. 8. Provide a hyperlink from the IRS Web Site to the Contractor's Web Site. IRS may identify participating partners in its information materials or products. All decisions involving these or other marketing decisions will be solely at the discretion of the IRS. C.2.3 DELIVERABLES The Contractor shall submit the following deliverables in accordance with Section C.2.1, Duties and Responsibilities of the Contractor and Section C.2.4, Schedule of Performance. Deliverables Summary Electronic Payments Transaction Processing Network Documentation Capacity Analysis Computer Security Plan/Guide Configuration Management Plan Risk Assessment Plan Disaster Recovery Plan Network Design and Architecture Schematic Test Plans and Test Reports (including test data output reports) Functional Requirements/User Interface Documentation (as applicable) Scripts, User Interface Screens and General User Information Materials Process and Data Flow Schematic System Administrator Manual Work Breakdown Structure/Schedule Monthly Development Status Reports Daily Transaction Reports Monthly Transaction Reports Chargeback Reports (If Applicable) Ad Hoc Reports Incident Reports Findings Reports Marketing Reports C.2.3.1 ELECTRONIC PAYMENTS The required data fields for each tax payment include: a. The primary taxpayer's identification number [(first social security number (SSN) as shown on the tax return for the year for which the payment applies) and secondary SSN if the tax type is 4868 and the taxpayer indicates a supplemental filing is needed]; b. first four characters of the last name of the primary taxpayer; c. payment type; d. tax period ending date (six character date field); e. payment amount; f. payment authorization date; g. daytime telephone number; and, h. confirmation number. C.2.3.2 MONTHLY DEVELOPMENT STATUS REPORTS The Contractor shall provide monthly status reports on the 10th day of each month through the implementation date of the program. The report shall cover the overall progress of the program's development. Copies of the report shall be provided to the IRS Contracting Officer (CO) (one copy), the Contracting Officer's Technical Representative (COTR) (one copy) and the IRS Program Manager (one copy) or his/her designee. The report shall contain the following information: a. date of report, b. project manager name, c. project manager telephone number, fax number and e-mail address, d. a brief description of the work accomplished, emphasizing the progress made since the last reporting period, e. a description of any unresolved and/or anticipated problems, if any (include schedule impacts), f. an estimate of the percent of work accomplished to date, and g. a statement on the status of the program as it relates to the work breakdown schedule, either confirming that milestones are on schedule or explaining the nature and extent of the pending delay. C.2.3.3 DAILY AND MONTHLY TRANSACTION REPORTS The Contractor shall provide daily and cumulative monthly transaction reports. The reports shall cover the post-implementation progress of the program. Daily reports shall be provided no later than 9:00 am Eastern Time and should include all prior day transactions and cumulative data. Monthly reports shall be provided by the 10th day of each month and include all prior month transactions and reconcile any adjustments made during that month. Copies of the reports shall be provided to the IRS Contracting Officer (CO)(one copy), the Contracting Officer's Technical Representative (COTR) (one copy) and the Program Manager (one copy) or his/her designee. The report shall contain the following information: a. date of report, b. period covered, c. total number of transactions, d. dollar amount of transactions, e. total number of successful attempts, f. dollar amount of successful attempts, g. average payment amount, h. largest dollar payment amount, i. total number of failed attempts, j. dollar amount of failed attempts, k. reasons for failed attempts, l. customer service activity, m. report of entity rejects, where the user has provided invalid entity information, and n. report of 4868 payment entities (primary and/or secondary) for those taxpayers who indicate a supplemental filing (Form 709), if applicable. Aggregate payment volumes by payment type and dollar amount shall be provided daily. Historical data should also be provided to compare changes in volumes from the prior year. C.2.3.4 CHARGEBACK REPORTS The Contractor shall provide weekly reports of all credit card chargeback actions identifying the transaction date, dollar amount, action request date, and reason for action. These actions shall be in conformance with chargeback procedures issued by the IRS and meet the definition of chargebacks provided by the Contractor and agreed to by the IRS. These reports shall be delivered to the designated IRS point of contact by close of business each Friday. C.2.3.5 AD HOC REPORTS The Contractor shall provide ad hoc reports as necessary. Ad hoc reports may include but are not limited to reporting information that supports or further defines incident reports where payment transactions are delayed or otherwise impacted. Incident reports should be provided as described in Section C.2.1. Copies of the reports shall be provided to the IRS Contracting Officer (CO)(one copy), the Contracting Officer's Technical Representative (COTR) (one copy) and the Program Manager (one copy) or his/her designee. C.2.3.6 FINDINGS REPORT The Contractor shall provide an initial and supplemental findings report. A copy of the report shall be provided to the IRS Contracting Officer (CO)(one copy), the Contracting Officer's Technical Representative (COTR) (one copy), and the IRS Program Manager (three copies) or his/her designee. The report shall describe: a. The program features; b. conduct and findings of the program as they relate to the Contractor's and any subcontractor's performance (including a summary of all payment transactions, any problems, changes made during the filing season and lessons learned); c. recommendations for improvement including changes to the Contractor's and/or IRS processes; d. practitioner and/or client feedback including customer satisfaction survey results; and, e. customer service activity based on automated and live assistance provided. The initial report shall include activity occurring between January and April. A supplemental report shall be submitted which includes a summary of the initial report's findings and activity from May through October. Activity occurring in November and December may be combined with the subsequent option year's initial findings report. C.2.3.7 MARKETING REPORTS The Contractor shall provide an initial and supplemental marketing report in conjunction with the Findings Reports described above. The reports shall contain a narrative description of (1) accomplishments; (2) the number of unique visits to and from the Contractor's Web site by way of a hyperlink established with the IRS; (3) measurement of success (for example, number of unique taxpayers that electronically pay as a result of the marketing campaign); and (4) difficulties/ barriers. The initial report shall include activity occurring between January and April of each year. The supplemental report, if applicable, shall include a summary of the initial report findings and marketing activity from May through October. These reports are subject to inspection, verification and approval by the IRS.
C.2.4 SCHEDULE OF PERFORMANCE Responsible Party Event Date IRS Contract Award 04/30/2002 IRS Provide Report Formats 05/09/2002 Contractor Provide draft WBS (including requirements, development, testing and 05/30/2002 implementation phases) and workflow schematics IRS Provide comments on draft WBS 06/24/2002 Contractor Provide baselined WBS 07/01/2002 Contractor Draft Functional Requirements/User Interface Documentation 07/01/2002 Contractor Final Functional Requirements/User Interface Documentation 08/15/2002 Contractor Transaction Processing Network Documentation 08/15/2002 Contractor Provide marketing plan 08/15/2002 IRS Provide comments on marketing plan 08/29/2002 Contractor System Administrator Manual 09/02/2002 Contractor Test Plan 09/02/2002 Contractor Begin internal application testing 09/16/2002 IRS Provide general information for taxpayers (brochure) 09/30/2002 Contractor Obtain signed contracts with other participating subcontractors, if 09/30/2002 applicable IRS Provide revised credit card chargeback procedures, if applicable 10/07/2002 Contractor Complete internal feature testing 11/08/2002 Contractor Begin full circle integrated test with IRS/TFA 11/11/2002 Contractor Complete full circle integrated test with IRS/TFA 11/27/2002 Contractor Obtain bulk filer certification 12/06/2002 Contractor Implement Electronic Payment services 01/10/2003 IRS Provide hyperlink from the IRS web site to the Contractor's Web page 01/10/2003 IRS Begin Option Year, If Exercised 06/01/2003 Contractor Deliver Initial Findings Report 06/27/2003 Contractor Deliver Supplemental Findings Report 11/14/2003 Notes: 1. The beginning date for applications that include 1040 balance due payments will be consistent with the IRS e-file filing season start date. 2. Each 12-month option year will begin on June 1 and end on May 31. Deliverable due dates for each contract option year will be commensurate with the base period due dates, as described above.
C.3 CONTRACT TERMS AND CONDITIONS -- COMMERCIAL ITEMS FAR 52.212-4 (FEB 2002) (TAILORED) (a) Inspection/Acceptance. The Contractor shall only tender for acceptance those items that conform to the requirements of this contract. The Government reserves the right to inspect or test any supplies or services that have been tendered for acceptance. The Government may require repair or replacement of nonconforming supplies or reperformance of nonconforming services at no increase in contract price. The Government must exercise its post-acceptance rights- (1) Within a reasonable time after the defect was discovered or should have been discovered; and (2) Before any substantial change occurs in the condition of the item, unless the change is due to the defect in the item. (b) Assignment. The Contractor or its assignee may assign its rights to receive payment due as a result of performance of this contract to a bank, trust company, or other financing institution, including any Federal lending agency in accordance with the Assignment of Claims Act (31 U.S.C. 3727). However, when a third party makes payment (e.g., use of the Governmentwide commercial purchase card), the Contractor may not assign its rights to receive payment under this contract. (c) Changes. Changes in the terms and conditions of this contract may be made only by written agreement of the parties. (d) Disputes. This contract is subject to the Contract Disputes Act of 1978, as amended (41 U.S.C. 601-613). Failure of the parties to this contract to reach agreement on any request for equitable adjustment, claim, appeal or action arising under or relating to this contract shall be a dispute to be resolved in accordance with the clause at FAR 52.233-1, Disputes, which is incorporated herein by reference. The Contractor shall proceed diligently with performance of this contract, pending final resolution of any dispute arising under the contract. (e) Definitions. The clause at FAR 52.202-1, Definitions, is incorporated herein by reference. (f) Excusable delays. The Contractor shall be liable for default unless nonperformance is caused by an occurrence beyond the reasonable control of the Contractor and without its fault or negligence such as, acts of God or the public enemy, acts of the Government in either its sovereign or contractual capacity, fires, floods, epidemics, quarantine restrictions, strikes, unusually severe weather, and delays of common carriers. The Contractor shall notify the Contracting Officer in writing as soon as it is reasonably possible after the commencement of any excusable delay, setting forth the full particulars in connection therewith, shall remedy such occurrence with all reasonable dispatch, and shall promptly give written notice to the Contracting Officer of the cessation of such occurrence. (g) Patent indemnity. The Contractor shall indemnify the Government and its officers, employees and agents against liability, including costs, for actual or alleged direct or contributory infringement of, or inducement to infringe, any United States or foreign patent, trademark or copyright, arising out of the performance of this contract, provided the Contractor is reasonably notified of such claims and proceedings. (h) No fee or consideration. The Contractor and the Government mutually agree that all work will be done at no cost to the Government. This agreement will be in conformance with the Taxpayer Relief Act of 1997 codified by Internal Revenue Code 6311(d)(2) namely, "the Secretary is authorized to enter into contracts to obtain services related to receiving payment by other means where cost beneficial to the government. The Secretary may not provide any fee or provide any other consideration under such contracts". (i)Risk of loss. Unless the contract specifically provides otherwise, risk of loss or damage to the supplies provided under this contract shall remain with the Contractor until, and shall pass to the Government upon: (1) Delivery of the supplies to a carrier, if transportation is f.o.b. origin; or (2) Delivery of the supplies to the Government at the destination specified in the contract, if transportation is f.o.b. destination. (j) Termination for the Government's convenience. The Government reserves the right to terminate this contract, or any part hereof, for its sole convenience. In the event of such termination, the Contractor shall immediately stop all work hereunder and shall immediately cause any and all of its suppliers and subcontractors to cease work. Subject to the terms of this contract, the Contractor shall be paid a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges the Contractor can demonstrate to the satisfaction of the Government using its standard record keeping system, have resulted from the termination. The Contractor shall not be required to comply with the cost accounting standards or contract cost principles for this purpose. This paragraph does not give the Government any right to audit the Contractor's records. The Contractor shall not be paid for any work performed or costs incurred which reasonably could have been avoided. (k) Termination for cause. The Government may terminate this contract, or any part hereof, for cause in the event of any default by the Contractor, or if the Contractor fails to comply with any contract terms and conditions, or fails to provide the Government, upon request, with adequate assurances of future performance. In the event of termination for cause, the Government shall not be liable to the Contractor for any amount for supplies or services not accepted, and the Contractor shall be liable to the Government for any and all rights and remedies provided by law. If it is determined that the Government improperly terminated this contract for default, such termination shall be deemed a termination for convenience. (l) Title. Unless specified elsewhere in this contract, title to items furnished under this contract shall pass to the Government upon acceptance, regardless of when or where the Government takes physical possession. (m) Warranty. The Contractor warrants and implies that the items delivered hereunder are merchantable and fit for use for the particular purpose described in this contract. (n) Limitation of liability. Except as otherwise provided by an express warranty, the Contractor will not be liable to the Government for consequential damages resulting from any defect or deficiencies in accepted items. (o) Other compliances. The Contractor shall comply with all applicable Federal, State and local laws, executive orders, rules and regulations applicable to its performance under this contract. (p) Compliance with laws unique to Government contracts. The Contractor agrees to comply with 31 U.S.C. 1352 relating to limitations on the use of appropriated funds to influence certain Federal contracts; 18 U.S.C. 431 relating to officials not to benefit; 40 U.S.C. 327, et seq., Contract Work Hours and Safety Standards Act; 41 U.S.C. 51-58, Anti-Kickback Act of 1986; 41 U.S.C. 265 and 10 U.S.C. 2409 relating to whistleblower protections; 49 U.S.C. 40118, Fly American; and 41 U.S.C. 423 relating to procurement integrity. (q) Order of precedence. Any inconsistencies in this solicitation or contract shall be resolved by giving precedence in the following order: (1) The schedule of supplies/services. (2) The Assignments, Disputes, Payments, Invoice, Other Compliances, and Compliance with Laws Unique to Government Contracts paragraphs of this clause. (3) The clause at 52.212-5. (4) Addenda to this solicitation or contract, including any license agreements for computer software. (5) Solicitation provisions if this is a solicitation. (6) Other paragraphs of this clause. (7) The Standard Form 1449. (8) Other documents, exhibits, and attachments. (9) The specification. (End of clause) C.4 AUTHORITY - CONTRACTING OFFICER, CONTRACTING OFFICER'S TECHNICAL REPRESENTATIVE AND CONTRACTOR'S PROJECT MANAGER C.4.1 ADMINISTRATIVE CONTRACTING OFFICER The IRS Contracting Officer designated for administering this contract is: Carol Ransom IRS Procurement, Suite 500 6009 Oxon Hill Road Oxon Hill, MD 20745 Voice : (202)283-1163 Fax : (02)283-1099 Email : Carol.A.Ransom@irs.gov The Contracting Officer, in accordance with Subpart 1.6 of the Federal Acquisition Regulation, is the only person authorized to make or approve any changes in any of the requirements of this contract, and notwithstanding any clauses contained elsewhere in this contract, the said authority remains solely with the Contracting Officer. In the event the Contractor makes any changes at the direction of any person other than the Contracting Officer, the change will be considered to have been made without authority and is not binding on the Government. C.4.2 CONTRACTING OFFICER'S TECHNICAL REPRESENTATIVE The Contracting Officer's Technical Representative (COTR) designated for this contract is: Lee Lawrence C4-237 Internal Revenue Service 5000 Ellin Road Lanham, MD 20706 202-283-0445 202-283-4786 lee.lawrence@irs.gov The COTR will represent the Contracting Officer in the administration of technical details within the scope of this contract. The COTR is also responsible for the final inspection and acceptance of all reports, and such other responsibilities as may be specified in the contract. The COTR is not otherwise authorized to make any representations or commitments of any kind on behalf of the Contracting Officer or the Government. The COTR does not have authority to alter the Contractor's obligations or to change the contract specifications, price, terms or conditions. If, as a result of technical discussions, it is desirable to modify contract obligations or the statement of work, changes will be issued in writing and signed by the Contracting Officer. The Government may change the COTR assignment for this contract at any time without prior notice to the Contractor. The Contractor will be notified of the change. C.4.3 PROJECT MANAGER The Contractor's designated Project Manager for this contract is: Steve Johnson 925-855-5040 (v) 925-820-0517 (f) sjohnson@officialpayments.com The Contractor shall provide a Project Manager for this contract who shall have the authority to make any no-cost contract, technical, hiring and dismissal decisions, or special arrangements regarding this contract. The Project Manager shall be responsible for the overall management and coordination of this contract and shall act as the central point of contact with the Government. The Project Manager shall have full authority to act for the Contractor in the performance of the required services. The Project Manager, or a designated representative, shall meet with the COTR to discuss problem areas as they occur. The Project Manager, or designated representative, shall respond within four work hours after notification of the existence of a problem. The Project Manager shall be able to fluently read, write, and speak the English language. C.5 CONTRACT CORRESPONDENCE Notwithstanding the Contractor's responsibility for total management during the performance of this contract, the administration of the contract will require maximum coordination between the Government and the Contractor. To promote timely and effective administration, all correspondence pertaining to contractual or administrative matters under the contract shall be addressed to the assigned Administrative Contracting Officer. C.6 DISCLOSURE OF INFORMATION-SAFEGUARDS (JAN 1998) (IRSAP 1052.224-9000) In performance of this contract, the Contractor agrees to comply and assume responsibility for compliance by its employees with the following requirements: (1) All work shall be performed under the supervision of the contractor or the contractor's responsible employees. (2) Any return or return information made available shall be used only for the purpose of carrying out the provisions of this contract. Information contained in such material shall be treated as confidential and shall not be divulged or made known in any manner to any person except as may be necessary in the performance of the contract. Inspection by or disclosure to anyone other than an officer or employee of the contractor shall require prior written approval of the Internal Revenue Service. Requests to make such inspections or disclosures should be addressed to the IRS Contracting Officer. (3) Should a person (contractor or subcontractor) or one of his/her employees make any unauthorized inspection(s) or disclosure(s) of confidential tax information, the terms of the Default clause (FAR 52.2498), incorporated herein by reference, may be invoked, and the person (contractor or subcontractor) will be considered to be in breach of this contract. C.7 DISCLOSURE OF "OFFICIAL USE ONLY" INFORMATION SAFEGUARDS (IRSAP 1052.224-70(D) (DEC 1988) Any Treasury Department information made available or to which access is provided, and which is marked or should be marked "Official Use Only", shall be used only for the purpose of carrying out the provisions of this contract and shall not be divulged or made known in any manner to any person except as may be necessary in the performance of the contract. Disclosure to anyone other than an officer or employee of the contractor or subcontractor at any tier shall require prior written approval of the IRS. Requests to make such disclosure should be addressed to the IRS Contracting Officer. C.8 DISCLOSURE OF INFORMATION--CRIMINAL/CIVIL SANCTIONS (IRSAP 1052.224-71(a) (DEC 1998) (1) Each officer or employee of any person (contractor or subcontractor) at any tier to whom returns or return information is or may be disclosed shall be notified in writing by the person (contractor or subcontractor) that returns or return information disclosed to such officer or employee can be used only for a purpose and to the extent authorized herein, and that further disclosure of any such returns or return information for a purpose or to an extent unauthorized herein constitutes a felony punishable upon conviction by a fine of as much as $5,000 or imprisonment for as long as five years, or both, together with the costs of prosecution. Such person (contractor or subcontractor) shall also notify each such officer and employee that any such unauthorized future disclosure of returns or return information may also result in an award of civil damages against the officer or employee in an amount not less than $1,000 with respect to each instance of unauthorized disclosure plus in the case of willful disclosure or a disclosure which is the result of gross negligence, punitive damages, plus the cost of the action. These penalties are prescribed by IRC Sections 7213 and 7431. (2) Each officer or employee of any person (contractor or subcontractor) to whom returns or return information is or may be disclosed shall be notified in writing by such person that any return or return information made available in any format shall be used only for the purpose of carrying out the provisions of this contract and that inspection of any such returns or return information for a purpose or to an extent not authorized herein constitutes a criminal misdemeanor punishable upon conviction by a fine of as much as $1,000.00 or imprisonment for as long as 1 year, or both, together with the costs of prosecution. Such person (contractor or subcontractor) shall also notify each such officer and employee that any such unauthorized inspection of returns or return information may also result in an award of civil damages against the officer or employee in an amount equal to the sum of the greater of $1,000.00 for each act of unauthorized inspection with respect to which such defendant is found liable or the sum of the actual damages sustained by the plaintiff as a result of such unauthorized inspection plus in the case of a willful inspection or an inspection which is the result of gross negligence, punitive damages, plus the costs of the action. The penalties are prescribed by IRC Sections 7213A and 7431. (3) Additionally, it is incumbent upon the contractor to inform its officers and employees of the penalties for improper disclosure imposed by the Privacy Act of 1974, 5 U.S.C. 552a. Specifically, 5 U.S.C. 552a(I)(1), which is made applicable to contractors by 5 U.S.C. 552a(m)(1), provides that any officer or employee of a contractor, who by virtue of his/her employment or official position, has possession of or access to agency records which contain individually identifiable information, the disclosure of which is prohibited by the Privacy Act or regulations established thereunder, and who knowing that disclosure of the specific material is so prohibited, willfully discloses the material in any manner to any person or agency not entitled to receive it, shall be guilty of a misdemeanor and fined not more than $5,000. C.9 DISCLOSURE OF INFORMATION -- OFFICIAL USE ONLY (IRSAP 1052.224-71(b) (DEC 1988) Each officer or employee of the contractor to whom "Official Use Only" information may be made available or disclosed shall be notified in writing by the contractor that "Official Use Only" information disclosed to such officer or employee can be used only for a purpose and to the extent authorized herein, and that further disclosure of any such "Official Use Only" information, by any means, for a purpose or to an extent unauthorized herein, may subject the offender to criminal sanctions imposed by 18 U.S.C. Sections 641. C.10 DISCLOSURE OF INFORMATION-INSPECTION (IRSAP 1052.224-72) (DEC1988) The Internal Revenue Service shall have the right to send its officers and employees into the offices and plants of the contractor for inspection of the facilities and operations provided for the performance of any work under this contract. On the basis of such inspection, the Contracting Officer may require specific measures in cases where the contractor is found to be noncompliant with contract safeguards. C.11 PUBLIC RELEASE OF INFORMATION (1) The Contractor shall obtain the written permission of the Contracting Officer before releasing or using any information regarding the Contractor's selection for, or performance of work on, this contract. Information including, but not limited to, advertisements, unclassified speeches, articles, press releases, presentations, displays or demonstrations developed or proposed for release to the public must be submitted in their entirety to the Contracting Officer. The Contractor shall request, in writing, permission to release information describing the scope of the information to be released and the purpose for its release. This clause does not affect the Contractor's rights with regard to patents, which are governed by the patent clauses of this contract. This clause shall apply to subcontractors at any tier. (2) The Contractor shall not impose limitations on the use of any information or data, or any portion thereof, which has been published in any form or is otherwise generally available in the public domain. (3) The Contractor in publicizing its selection for, or its performance of work on, this contract shall not state or imply that the Government endorses or warrants its products or services. Information publicized shall clearly indicate that the taxpayer's decision to use any of the Contractor's products or services will not result in any special treatment from the Internal Revenue Service. This clause shall apply to subcontractors at any tier. (4) In the event of a termination for the convenience of the Government, the Government shall be responsible for press releases, jointly prepared with the Contractor, declaring the termination of the program by the Government. Such releases shall be placed where determined by the contractor; except that the Government reserves the right to either place such releases itself in a reasonable number of new media or paying for the contractor's placement of such releases. The Government shall consider the contractor's reasonable request for the number of news media to receive such releases. The Government shall also consider the contractor's reasonable request that it not issue a public release or public announcement of the termination of the contract for the Government's convenience. C.12 ADDENDUM 1 C.12.1 FAR CLAUSES INCORPORATED BY REFERENCE 52.252-2 CLAUSES INCORPORATED BY REFERENCE (FEB 1998) This contract incorporates one or more clauses by reference, with the same force and effect as if they were given in full text. Upon request, the Contracting Officer will make their full text available. Also, the full text of a clause may be accessed electronically at this address http://www.arnet.gov/far/. FEDERAL ACQUISITION REGULATION (48 CFR CHAPTER 1) CLAUSES INCORPORATED BY REFERENCE NUMBER TITLE DATE 52.203-3 GRATUITIES APR 1984 52.209-6 PROTECTING THE GOVERNMENT'S INTEREST WHEN JUL 1995 SUBCONTRACTING WITH CONTRACTORS DEBARRED, SUSPENDED, OR PROPOSED FOR DEBARMENT 52.227-14 RIGHTS IN DATA - GENERAL (ALT III) , JUN 1987 (ALT IV) C.12.2 TERM OF CONTRACT (a) The term of this contract is from effective date of contract award through May 31, 2003. (b) This contract includes four (4) one year option periods for the renewal of the contract, which may be unilaterally exercised by the Government. C.12.3 OPTION TO EXTEND THE TERM OF THE CONTRACT FAR 52.217-9 (MAR 2000) (a) The Government may extend the term of the contract by written notice to the Contractor within 15 calendar days prior to contract expiration; provided, that the Government shall give the Contractor a preliminary written notice of its intent to extend at least 60 days before the contract expires. The preliminary notice does not commit the Government to an extension. (b) If the Government exercises this option, the extended contract shall be considered to include this option provision. (c) The total duration of this contract, including the exercise of any options under this clause, shall not exceed approximately 65 months depending on contract commencement and number of option periods. The option period for programs in Filing Season 2007 will be the last option period in all contracts awarded as a result if this solicitation. C.13 CONTRACT TERMS AND CONDITIONS REQUIRED TO IMPLEMENT STATUTES OR EXECUTIVE ORDERS -- COMMERCIAL ITEMS, FAR 52.212-5 (DEC 2001) (a) The Contractor shall comply with the following FAR clauses, which are incorporated in this contract by reference, to implement provisions of law or executive orders applicable to acquisitions of commercial items: (1) 52.222-3, Convict Labor (E.O. 11755). (2) 52.233-3, Protest after Award (31 U.S.C. 3553). (b) The Contractor shall comply with the FAR clauses in this paragraph (b) that the Contracting Officer has indicated as being incorporated in this contract by reference to implement provisions of law or Executive orders applicable to acquisitions of commercial items or components: [Contracting Officer must check as appropriate.] _x_ (1) 52.203-6, Restrictions on Subcontractor Sales to the Government, with Alternate I (41 U.S.C. 253g and 10 U.S.C. 2402). __ (2) 52.219-3, Notice of Total HUBZone Small Business Set-Aside (Jan 1999). __ (3) 52.219-4, Notice of Price Evaluation Preference for HUBZone Small Business Concerns (Jan 1999) (if the offeror elects to waive the preference, it shall so indicate in its offer). __ (4)(i) 52.219-5, Very Small Business Set-Aside (Pub. L. 103-403, section 304, Small Business Reauthorization and Amendments Act of 1994). __ (ii) Alternate I to 52.219-5. __ (iii) Alternate II to 52.219-5. _x_ (5) 52.219-8, Utilization of Small Business Concerns (15 U.S.C. 637 (d)(2) and (3)). ___ (6) 52.219-9, Small Business Subcontracting Plan (15 U.S.C. 637(d)(4)). __ (7) 52.219-14, Limitations on Subcontracting (15 U.S.C. 637(a)(14)). __ (8)(i) 52.219-23, Notice of Price Evaluation Adjustment for Small Disadvantaged Business Concerns (Pub. L. 103-355, section 7102, and 10 U.S.C. 2323) (if the offeror elects to waive the adjustment, it shall so indicate in its offer). ___(ii) Alternate I of 52.219-23. __ (9) 52.219-25, Small Disadvantaged Business Participation Program-Disadvantaged Status and Reporting (Pub. L. 103-355, section 7102, and 10 U.S.C. 2323). __ (10) 52.219-26, Small Disadvantaged Business Participation Program-Incentive Subcontracting (Pub. L. 103-355, section 7102, and 10 U.S.C. 2323). _X_ (11) 52.222-21, Prohibition of Segregated Facilities (Feb 1999) _X_ (12) 52.222-26, Equal Opportunity (E.O. 11246). _X_ (13) 52.222-35, Equal Opportunity for Special Disabled Veterans, Veterans of the Vietnam Era, and Other Eligible Veterans (38 U.S.C. 4212) _X_ (14) 52.222-36, Affirmative Action for Workers with Disabilities (29 U.S.C. 793). _X_ (15) 52.222-37, Employment Reports on Special Disabled Veterans, Veterans of the Vietnam Era, and Other Eligible Veterans (38 U.S.C. 4212). __ (16) 52.222-19, Child Labor-Cooperation with Authorities and Remedies (E.O. 13126). __ (17)(i) 52.223-9, Estimate of Percentage of Recovered Material Content for EPA-Designated Products (42 U.S.C. 6962(c)(3)(A)(ii)). __ (ii) Alternate I of 52.223-9 (42 U.S.C. 6962(i)(2)(C)). __ (18) 52.225-1, Buy American Act-Balance of Payments Program-Supplies (41 U.S.C. 10a - 10d). __ (19)(i) 52.225-3, Buy American Act-North American Free Trade Agreement-Israeli Trade Act-Balance of Payments Program (41 U.S.C. 10a - 10d, 19 U.S.C. 3301 note, 19 U.S.C. 2112 note). __ (ii) Alternate I of 52.225-3. __ (iii) Alternate II of 52.225-3. __ (20) 52.225-5, Trade Agreements (19 U.S.C. 2501, et seq., 19 U.S.C. 3301 note). _X_ (21) 52.225-13, Restriction on Certain Foreign Purchases (E.O. 12722, 12724, 13059, 13067, 13121, and 13129). __ (22) 52.225-15, Sanctioned European Union Country End Products (E.O. 12849). __ (23) 52.225-16, Sanctioned European Union Country Services (E.O. 12849). __ (24) 52.232-33, Payment by Electronic Funds Transfer-Central Contractor Registration (31 U.S.C. 3332). __ (25) 52.232-34, Payment by Electronic Funds Transfer-Other than Central Contractor Registration (31 U.S.C. 3332). __ (26) 52.232-36, Payment by Third Party (31 U.S.C. 3332). X_ (27) 52.239-1, Privacy or Security Safeguards (5 U.S.C. 552a). __ (28)(i) 52.247-64, Preference for Privately Owned U.S.-Flag Commercial Vessels (46 U.S.C. 1241). __ (ii) Alternate I of 52.247-64. (c) The Contractor shall comply with the FAR clauses in this paragraph (c), applicable to commercial services, which the Contracting Officer has indicated as being incorporated in this contract by reference to implement provisions of law or executive orders applicable to acquisitions of commercial items or components: [Contracting Officer check as appropriate.] __ (1) 52.222-41, Service Contract Act of 1965, As Amended (41 U.S.C. 351, et seq.). __ (2) 52.222-42, Statement of Equivalent Rates for Federal Hires (29 U.S.C. 206 and 41 U.S.C. 351, et seq.). __ (3) 52.222-43, Fair Labor Standards Act and Service Contract Act-Price Adjustment (Multiple Year and Option Contracts) (29 U.S.C. 206 and 41 U.S.C. 351, et seq.). __ (4) 52.222-44, Fair Labor Standards Act and Service Contract Act-Price Adjustment (29 U.S.C. 206 and 41 U.S.C. 351, et seq.). __ (5) 52.222-47, SCA Minimum Wages and Fringe Benefits Applicable to Successor Contract Pursuant to Predecessor Contractor Collective Bargaining Agreement (CBA) (41 U.S.C. 351, et seq.). (d) Comptroller General Examination of Record. The Contractor shall comply with the provisions of this paragraph (d) if this contract was awarded using other than sealed bid, is in excess of the simplified acquisition threshold, and does not contain the clause at 52.215-2, Audit and Records-Negotiation. (1) The Comptroller General of the United States, or an authorized representative of the Comptroller General, shall have access to and right to examine any of the Contractor's directly pertinent records involving transactions related to this contract. (2) The Contractor shall make available at its offices at all reasonable times the records, materials, and other evidence for examination, audit, or reproduction, until 3 years after final payment under this contract or for any shorter period specified in FAR Subpart 4.7, Contractor Records Retention, of the other clauses of this contract. If this contract is completely or partially terminated, the records relating to the work terminated shall be made available for 3 years after any resulting final termination settlement. Records relating to appeals under the disputes clause or to litigation or the settlement of claims arising under or relating to this contract shall be made available until such appeals, litigation, or claims are finally resolved. (3) As used in this clause, records include books, documents, accounting procedures and practices, and other data, regardless of type and regardless of form. This does not require the Contractor to create or maintain any record that the Contractor does not maintain in the ordinary course of business or pursuant to a provision of law. (e) Notwithstanding the requirements of the clauses in paragraphs (a), (b), (c) or (d) of this clause, the Contractor is not required to include any FAR clause, other than those listed below (and as may be required by an addenda to this paragraph to establish the reasonableness of prices under Part 15), in a subcontract for commercial items or commercial components- (1) 52.222-26, Equal Opportunity (E.O. 11246); (2) 52.222-35, Equal Opportunity for Special Disabled Veterans, Veterans of the Vietnam Era, and Other Eligible Veterans (38 U.S.C. 4212); (3) 52.222-36, Affirmative Action for Workers with Disabilities (29 U.S.C. 793); (4) 52.247-64, Preference for Privately-Owned U.S. Flag Commercial Vessels (46 U.S.C. 1241) (flow down not required for subcontracts awarded beginning May 1, 1996); and (5) 52.222-41, Service Contract Act of 1965, As Amended (41 U.S.C. 351, et seq.). (End of clause) C.14 REHABILITATION ACT OF 1973, SECTION 508 IT ACCESSIBILITY REQUIREMENTS - STATEMENT OF WORK A. General 1. Purpose (Reference 36 CFR 1194.1) (a) The below technical standards are those issued by the Architectural and Transportation Barriers Compliance Board (Access Board), pursuant to Section 508 (a) (2) (A) of the Rehabilitation Act Amendments of 1998 (29 U.S.C. ss. 794 (d)) as enacted in the Workforce Investment Act of 1998. (The Access Board is an independent Federal agency established by Section 502 of the Rehabilitation Act (29 U.S.C. 792) whose primary mission is to promote accessibility for individuals with disabilities.) (b) Section 508 requires that when Federal agencies develop, procure, maintain, or use electronic and information technology, Federal employees with disabilities have access to and use of information and data that is comparable to the access and use by Federal employees who are not individuals with disabilities, unless an undue burden would be imposed on the agency. Section 508 also requires that individuals with disabilities, who are members of the public seeking information or services from a Federal agency, have access to and use of information and data that is comparable to that provided to the public who are not individuals with disabilities, unless an undue burden would be imposed on the agency. 2. Application (Reference 36 CFR 1194.2) (a) This section does not apply to Electronic and Information Technology (EIT, see definitions at A. 4. below) that is acquired by the contractor incidental to the contract, or is neither used nor accessed by Federal employees or members of the public, and contractor employees in their professional capacity are not considered members of the public. (b) For any EIT product proposed in response to this solicitation as a deliverable that is a commercial item (as defined by the Federal Acquisition Regulation, Subpart 2.101) or any EIT product to be developed in response to this solicitation, that will be available to meet this contract's delivery requirements, the contractor must represent within his proposal that the product(s) complies with all of the below standards. The contractor must fully complete the spreadsheet, Electronic & Information Technology Accessibility Standards Evaluation, located in Section E, and submit it with his/her proposal. (c) If such product does not comply with all of the below standards, the contractor must specify each specific standard that is not met. 3. Electronic and Information Technology (EIT) Product General Exceptions (Reference 36 CFR 1194.3) (a) This section does not apply to any EIT operated by agencies, the function, operation, or use of which involves: (1) Intelligence activities (2) Cryptographic activities related to national security (3) Command and control of military forces (4) Equipment as an integral part of a weapon or weapon system (5) Systems critical to the direct fulfillment of military or intelligence missions (b) Products acquired by a contractor incidental to a contract, or are neither used nor accessed by Federal employees or members of the public, and contractor employees and all personnel related to the contract are not considered members of the public; (c) Products or components of products that would require a fundamental alteration in their nature. (d) Products located in spaces frequented only by service personnel for maintenance, repair or occasional monitoring. 4. Section 508 Compliance (a) All Electronic and Information Technology (EIT) products or services furnished under this contract shall comply with the Electronic and Information Technology Accessibility Standards (36 CFR 1194). The Contractor must provide a comprehensive list of all offered specific electronic and information technology (EIT) products (supplies and services) that fully comply with Section 508 of the Rehabilitation Act of 1973, per the 1998 Amendments, and the Architectural and Transportation Barriers Compliance Board's Electronic and Information Technology Accessibility Standards at 36 CFR Part 1194. The Contractor must clearly indicate where this list with full details of compliance can be found (e.g., vendor's or other exact web page location). The contractor must ensure that the list is easily accessible by typical users beginning five calendar days after award. The contractor must maintain this detailed listing of compliant products for the full contract term, including all forms of extensions, and must ensure that it is current within three calendar days of changes to his product line. (b) The offeror must ensure that all EIT products that are less than fully compliant are offered pursuant to extensive market research, which ensures that they are the most compliant products and services available to satisfy this solicitation's requirements. (c) For every EIT product accepted under this contract by the Government that does not comply with 36 CFR Part 1194, the contractor shall, at the discretion of the Government, make every effort to replace or upgrade it with a compliant equivalent product or service, if commercially available and cost neutral, on either the planned refresh cycle of the product or service, or on the contract renewal date, whichever shall occur first." 5. Definitions (Reference 36 CFR 1194.4) The following definitions apply to this section: Agency. Any Federal department or agency, including the United States Postal Service. Alternate formats. Alternate formats usable by people with disabilities may include, but are not limited to, Braille, ASCII text, large print, recorded audio, and electronic formats that comply with this part. Alternate methods. Different means of providing information, including product documentation, to people with disabilities. Alternate methods may include, but are not limited to, voice, fax, relay service, TTY, Internet posting, captioning, text-to-speech synthesis, and audio description. Assistive technology. Any item, piece of equipment, or system, whether acquired commercially, modified, or customized, that is commonly used to increase, maintain, or improve functional capabilities of individuals with disabilities. Electronic and information technology. Includes information technology and any equipment or interconnected system or subsystem of equipment, that is used in the creation, conversion, or duplication of data or information. The term electronic and information technology includes, but is not limited to, telecommunications products (such as telephones), information kiosks and transaction machines, World Wide Web sites, multimedia, and office equipment such as copiers and fax machines. The term does not include any equipment that contains embedded information technology that is used as an integral part of the product, but the principal function of which is not the acquisition, storage, manipulation, management, movement, control, display, switching, interchange, transmission, or reception of data or information. For example, HVAC (heating, ventilation, and air conditioning) equipment such as thermostats or temperature control devices, and medical equipment where information technology is integral to its operation, are not information technology. Information technology. Any equipment or interconnected system or subsystem of equipment, that is used in the automatic acquisition, storage, manipulation, management, movement, control, display, switching, interchange, transmission, or reception of data or information. The term information technology includes computers, ancillary equipment, software, firmware and similar procedures, services (including support services), and related resources. Operable controls. A component of a product that requires physical contact for normal operation. Operable controls include, but are not limited to, mechanically operated controls, input and output trays, card slots, keyboards, or keypads. Product. Electronic and information technology. Self Contained, Closed Products. Products that generally have embedded software and are commonly designed in such a fashion that a user cannot easily attach or install assistive technology. These products include, but are not limited to, information kiosks and information transaction machines, copiers, printers, calculators, fax machines, and other similar types of products. Telecommunications. The transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received. TTY. An abbreviation for teletypewriter. Machinery or equipment that employs interactive text based communications through the transmission of coded signals across the telephone network. TTYs may include, for example, devices known as TDDs (telecommunication display devices or telecommunication devices for deaf persons) or computers with special modems. TTYs are also called text telephones. Undue burden. Undue burden means significant difficulty or expense. In determining whether an action would result in an undue burden, an agency shall consider all agency resources available to the program or component for which the product is being developed, procured, maintained, or used. B. Technical Standards 1194.21 Software applications and operating systems. (a) When software is designed to run on a system that has a keyboard, product functions shall be executable from a keyboard where the function itself or the result of performing a function can be discerned textually. (b) Applications shall not disrupt or disable activated features of other products that are identified as accessibility features, where those features are developed and documented according to industry standards. Applications also shall not disrupt or disable activated features of any operating system that are identified as accessibility features where the application programming interface for those accessibility features has been documented by the manufacturer of the operating system and is available to the product developer. (c) A well defined on-screen indication of the current focus shall be provided that moves among interactive interface elements as the input focus changes. The focus shall be programmatically exposed so that assistive technology can track focus and focus changes. (d) Sufficient information about a user interface element including the identity, operation and state of the element shall be available to assistive technology. When an image represents a program element, the information conveyed by the image must also be available in text. (e) When bitmap images are used to identify controls, status indicators, or other programmatic elements, the meaning assigned to those images shall be consistent throughout an application's performance. (f) Textual information shall be provided through operating system functions for displaying text. The minimum information that shall be made available is text content, text input caret location, and text attributes. (g) Applications shall not override user selected contrast and color selections and other individual display attributes. (h) When animation is displayed, the information shall be displayable in at least one non-animated presentation mode at the option of the user. (i) Color coding shall not be used as the only means of conveying information, indicating an action, prompting a response, or distinguishing a visual element. (j) When a product permits a user to adjust color and contrast settings, a variety of color selections capable of producing a range of contrast levels shall be provided. (k) Software shall not use flashing or blinking text, objects, or other elements having a flash or blink frequency greater than 2 Hz and lower than 55 Hz.. (l) When electronic forms are used, the form shall allow people using assistive technology to access the information, field elements, and functionality required for completion and submission of the form, including all directions and cues. 1194.22 Web-based intranet and internet information and applications. (a) A text equivalent for every non-text element shall be provided (e.g., via "alt", "longdesc", or in element content). (b) Equivalent alternatives for any multimedia presentation shall be synchronized with the presentation. (c) Web pages shall be designed so that all information conveyed with color is also available without color, for example from context or markup. (d) Documents shall be organized so they are readable without requiring an associated style sheet. (e) Redundant text links shall be provided for each active region of a server-side image map. (f) Client-side image maps shall be provided instead of server-side image maps except where the regions cannot be defined with an available geometric shape. (g) Row and column headers shall be identified for data tables. (h) Markup shall be used to associate data cells and header cells for data tables that have two or more logical levels of row or column headers. (i) Frames shall be titled with text that facilitates frame identification and navigation. (j) Pages shall be designed to avoid causing the screen to flicker with a frequency greater than 2 Hz and lower than 55 Hz. (k) A text-only page, with equivalent information or functionality, shall be provided to make a web site comply with the provisions of this part, when compliance cannot be accomplished in any other way. The content of the text-only page shall be updated whenever the primary page changes. (l) When pages utilize scripting languages to display content, or to create interface elements, the information provided by the script shall be identified with functional text that can be read by assistive technology. (m) When a web page requires that an applet, plug-in or other application be present on the client system to interpret page content, the page must provide a link to a plug-in or applet that complies with ss.1194.21(a) through (l). (n) When electronic forms are designed to be completed on-line, the form shall allow people using assistive technology to access the information, field elements, and functionality required for completion and submission of the form, including all directions and cues. (o) A method shall be provided that permits users to skip repetitive navigation links. (p) When a timed response is required, the user shall be alerted and given sufficient time to indicate more time is required. Note to 1. The Board interprets paragraphs (a) through (k) of this section as consistent with the following priority 1 Checkpoints of the Web Content Accessibility Guidelines 1.0 (WCAG 1.0) (May 5, 1999) published by the Web Accessibility Initiative of the World Wide Web Consortium: Section 1194.22 Paragraph (a) WCAG 1.0 Checkpoint 1.1 Section 1194.22 Paragraph (b) WCAG 1.0 Checkpoint 1.4 Section 1194.22 Paragraph (c) WCAG 1.0 Checkpoint 2.1 Section 1194.22 Paragraph (d) WCAG 1.0 Checkpoint 6.1 Section 1194.22 Paragraph (e) WCAG 1.0 Checkpoint 1.2 Section 1194.22 Paragraph (f) WCAG 1.0 Checkpoint 9.1 Section 1194.22 Paragraph (g) WCAG 1.0 Checkpoint 5.1 Section 1194.22 Paragraph (h) WCAG 1.0 Checkpoint 5.2 Section 1194.22 Paragraph (i) WCAG 1.0 Checkpoint 12.1 Section 1194.22 Paragraph (j) WCAG 1.0 Checkpoint 7.1 Section 1194.22 Paragraph (k) WCAG 1.0 Checkpoint 11.4 1. Paragraphs (l), (m), (n), (o), and (p) of this section are different from WCAG 1.0. Web pages that conform to WCAG 1.0, level A (i.e., all priority 1 checkpoints) must also meet paragraphs (l), (m), (n), (o), and (p) of this section to comply with this section. WCAG 1.0 is available at http://www.w3.org/TR/1999/WAI-WEBCONTENT-19990505. 1194.23 Telecommunications products. (a) Telecommunications products or systems which provide a function allowing voice communication and which do not themselves provide a TTY functionality shall provide a standard non-acoustic connection point for TTYs. Microphones shall be capable of being turned on and off to allow the user to intermix speech with TTY use. (b) Telecommunications products, which include voice communication functionality, shall support all commonly used cross-manufacturer non-proprietary standard TTY signal protocols. (c) Voice mail, auto-attendant, and interactive voice response telecommunications systems shall be usable by TTY users with their TTYs. (d) Voice mail, messaging, auto-attendant, and interactive voice response telecommunications systems that require a response from a user within a time interval, shall give an alert when the time interval is about to run out, and shall provide sufficient time for the user to indicate more time is required. (e) Where provided, caller identification and similar telecommunications functions shall also be available for users of TTYs, and for users who cannot see displays. (f) For transmitted voice signals, telecommunications products shall provide a gain adjustable up to a minimum of 20 dB. For incremental volume control, at least one intermediate step of 12 dB of gain shall be provided. (g) If the telecommunications product allows a user to adjust the receive volume, a function shall be provided to automatically reset the volume to the default level after every use. (h) Where a telecommunications product delivers output by an audio transducer which is normally held up to the ear, a means for effective magnetic wireless coupling to hearing technologies shall be provided. (i) Interference to hearing technologies (including hearing aids, cochlear implants, and assistive listening devices) shall be reduced to the lowest possible level that allows a user of hearing technologies to utilize the telecommunications product. (j) Products that transmit or conduct information or communication, shall pass through cross-manufacturer, non-proprietary, industry-standard codes, translation protocols, formats or other information necessary to provide the information or communication in a usable format. Technologies which use encoding, signal compression, format transformation, or similar techniques shall not remove information needed for access or shall restore it upon delivery. (k) Products which have mechanically operated controls or keys, shall comply with the following: (1) Controls and keys shall be tactilely discernible without activating the controls or keys. (2) Controls and keys shall be operable with one hand and shall not require tight grasping, pinching, or twisting of the wrist. The force required to activate controls and keys shall be 5 lbs. (22.2 N) maximum. (3) If key repeat is supported, the delay before repeat shall be adjustable to at least 2 seconds. Key repeat rate shall be adjustable to 2 seconds per character. (4) The status of all locking or toggle controls or keys shall be visually discernible, and discernible either through touch or sound. 1194.24 Video and multimedia products. (a) All analog television displays 13 inches and larger, and computer equipment that includes analog television receiver or display circuitry, shall be equipped with caption decoder circuitry which appropriately receives, decodes, and displays closed captions from broadcast, cable, videotape, and DVD signals. As soon as practicable, but not later than July 1, 2002, widescreen digital television (DTV) displays measuring at least 7.8 inches vertically, DTV sets with conventional displays measuring at least 13 inches vertically, and stand-alone DTV tuners, whether or not they are marketed with display screens, and computer equipment that includes DTV receiver or display circuitry, shall be equipped with caption decoder circuitry which appropriately receives, decodes, and displays closed captions from broadcast, cable, videotape, and DVD signals. (b) Television tuners, including tuner cards for use in computers, shall be equipped with secondary audio program playback circuitry. (c) All training and informational video and multimedia productions which support the agency's mission, regardless of format, that contain speech or other audio information necessary for the comprehension of the content, shall be open or closed captioned. (d) All training and informational video and multimedia productions which support the agency's mission, regardless of format, that contain visual information necessary for the comprehension of the content, shall be audio described. (e) Display or presentation of alternate text presentation or audio descriptions shall be user-selectable unless permanent. 1194.25 Self contained, closed products. (a) Self contained products shall be usable by people with disabilities without requiring an end-user to attach assistive technology to the product. Personal headsets for private listening are not assistive technology. (b) When a timed response is required, the user shall be alerted and given sufficient time to indicate more time is required. (c) Where a product utilizes touchscreens or contact-sensitive controls, an input method shall be provided that complies with ss.1194.23 (k) (1) through (4). (d) When biometric forms of user identification or control are used, an alternative form of identification or activation, which does not require the user to possess particular biological characteristics, shall also be provided. (e) When products provide auditory output, the audio signal shall be provided at a standard signal level through an industry standard connector that will allow for private listening. The product must provide the ability to interrupt, pause, and restart the audio at anytime. (f) When products deliver voice output in a public area, incremental volume control shall be provided with output amplification up to a level of at least 65 dB. Where the ambient noise level of the environment is above 45 dB, a volume gain of at least 20 dB above the ambient level shall be user selectable. A function shall be provided to automatically reset the volume to the default level after every use. (g) Color coding shall not be used as the only means of conveying information, indicating an action, prompting a response, or distinguishing a visual element. (h) When a product permits a user to adjust color and contrast settings, a range of color selections capable of producing a variety of contrast levels shall be provided. (i) Products shall be designed to avoid causing the screen to flicker with a frequency greater than 2 Hz and lower than 55 Hz. (j) Products which are freestanding, non-portable, and intended to be used in one location and which have operable controls shall comply with the following: (1) The position of any operable control shall be determined with respect to a vertical plane, which is 48 inches in length, centered on the operable control, and at the maximum protrusion of the product within the 48 inch length (see Figure 1 of this part). (2) Where any operable control is 10 inches or less behind the reference plane, the height shall be 54 inches maximum and 15 inches minimum above the floor. (3) Where any operable control is more than 10 inches and not more than 24 inches behind the reference plane, the height shall be 46 inches maximum and 15 inches minimum above the floor. (4) Operable controls shall not be more than 24 inches behind the reference plane (see Figure 2 of this part). 1194.26 Desktop and portable computers. (a) All mechanically operated controls and keys shall comply with ss.1194.23 (k) (1) through (4). (b) If a product utilizes touchscreens or touch-operated controls, an input method shall be provided that complies with ss.1194.23 (k) (1) through (4). (c) When biometric forms of user identification or control are used, an alternative form of identification or activation, which does not require the user to possess particular biological characteristics, shall also be provided. (d) Where provided, at least one of each type of expansion slots, ports and connectors shall comply with publicly available industry standards. C. Functional Performance Criteria 1194.31 Functional performance criteria. (a) At least one mode of operation and information retrieval that does not require user vision shall be provided, or support for assistive technology used by people who are blind or visually impaired shall be provided. (b) At least one mode of operation and information retrieval that does not require visual acuity greater than 20/70 shall be provided in audio and enlarged print output working together or independently, or support for assistive technology used by people who are visually impaired shall be provided. (c) At least one mode of operation and information retrieval that does not require user hearing shall be provided, or support for assistive technology used by people who are deaf or hard of hearing shall be provided. (d) Where audio information is important for the use of a product, at least one mode of operation and information retrieval shall be provided in an enhanced auditory fashion, or support for assistive hearing devices shall be provided. (e) At least one mode of operation and information retrieval that does not require user speech shall be provided, or support for assistive technology used by people with disabilities shall be provided. (f) At least one mode of operation and information retrieval that does not require fine motor control or simultaneous actions and that is operable with limited reach and strength shall be provided. D. Information, Documentation, and Support 1194.41 Information, documentation, and support. (a) Product support documentation provided to end-users shall be made available in alternate formats upon request, at no additional charge. (b) End-users shall have access to a description of the accessibility and compatibility features of products in alternate formats or alternate methods upon request, at no additional charge. (c) Support services for products shall accommodate the communication needs of end-users with disabilities. -----END PRIVACY-ENHANCED MESSAGE-----